Fred93's Blog

Prosper.com - Series E financing analysis

2011-06-08T21:05:00.000-07:00

A few days ago, Prosper.com received another venture capital investment.

Investors paid $0.739/share, a slightly higher price than last year's round, but still far far lower than the $9.692/share Prosper raised in 2007.

Here's a quick history of Prosper's venture capital.

04/2005, Series A, 4,023,999 shares for $7,464,450, or $1.875 per share.
02/2006, Series B, 3,310,382 shares for $12,412,301 or $3.776 per share.
06/2007, Series C, 2,063,448 shares for $19,919,009 or $9.692 per share.
04/2010, Series D, 20,340,705 shares for $14,700,000 or $0.723 per share.
06/2011, Series E, 23,222,747 shares for $17,150,000 or $0.739 per share.

Prosper paid an agent $375,000 to raise this money. If we subtract that commission out of the $17,150,000, then Prosper received net $0.722/share for this round.

In recent months, Prosper has been burning (losing) about $1 Million/month. (For example, see the Prosper 10Q filing for the quarter ending 3/31/2011, and leave out the nonrecurring items, such as insurance recoveries. They lost about $3 Million for the quarter.) Prosper's future depends on reducing that burn, eventually breaking even and then becoming profitable. My guess is that with fresh money in hand, they may initially increase the burn rate, as they put money to use for various marketing programs to try to drive the loan origination rate up.

As always, great discussion among P2P and Prosper.com lenders is found on prospers.org. I hope to see you there!

Prosper.com - 07/2010 Late Loan Stats Update

2010-08-02T22:22:00.001-07:00

Here's the July 2010 update to to my Prosper.com late loan statistics charts. I was unable to update these charts in May and June, because Prosper had the data offline at that time. The data's back, so here we go...

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default or "charge off" as it is now called). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

The worst month so far is still February '07. Of the loans originated by Prosper.com in February '07, 45.3% have now gone bad. Yipes!

More detail can be found in my earlier posts.

Click on the chart to see a larger clearer version.

I terminate each curve when all the loans in that cohort are "done", in other words paid off or charged off. You may notice some of the curves extend to the right farther than you would expect. That's because I'm following the Prosper data.

There are some quirks. For example, I would have expected that loans originated in Dec '06 would all be "done" by now, but the Prosper database shows that they are not. They hold 5 of the Dec '06 loans still in the "30 to 120 days late" category. These are 36 payment loans, with their first payment in Jan '07, and last payment in Dec '09. Prosper holds late loans until they are either paid off or 4 months late. If one of these Dec '06 loans were late on its last payment, one could imagine it might be held thru Jan, Feb, Mar, Apr of 2010, but then it should be charged off. Dec '06 is not the only month containing such anomalies. Not the first quirk in this data, and I'm sure it won't be the last.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month. Because Prosper's loans changed character when Prosper relaunched in Aug '09 with new credit score limits etc, I have separated this data into two charts, one for the "old" loans Oct'08 and earlier, and a second for the "new" loans Aug'09 and later.

For easy visual comparison, I included two of the "old loan" curves on the new loan chart below. These are approximately the best and worst months of the old loans, so you can see the range of slopes occupied for comparison. The new loans have lower default rates mostly because in Aug'09 Prosper raised the minimum credit score required to apply for a loan.

In July Prosper made several small adjustments. They revamped the "Prosper score" again. This is both good and bad news. No doubt the new score design is an attempted improvement, but the constantly changing baseline makes the score almost useless to lenders. Prosper also raised the origination fees on several credit grades of borrowers. C thru HR credit grade borrowers are now charged a 4.5% up front origination fee for a loan! Many lenders have questioned the wisdom of that price hike. Might increase Prosper's income, but not enough to save the company. To save the company, they have to increase loan volume.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

Many of the very early posts in this blog are still on point, and provide background on prosper, from a lender's perspective. If you're new to this, please read old posts before sending questions.

PS: The very best discussion among P2P and Prosper.com lenders is found on prospers.org. See you there!

Prosper.com - no more stats

2010-05-22T13:19:00.001-07:00

I'd like to update you on Prosper's late loan stats, but I can't.

On May 3rd, Prosper installed new software to process loan payments. There seem to be several problems with the new software.

On the same day, they have removed the Prosper loan performance data from the loan performance statistics web page. The page is still available, but since 5/3/2010 it has displayed the message "Marketplace data temporarily unavailable".

(In the meantime, you can refer to my most recent Prosper loan performance charts.)

Questions from lenders about when the loan performance data will reappear have gone unanswered. (One question from a lender posted on the prosper blog got a response saying the performance data will return, but not when. My own email to prosper on this subject has gone entirely unanswered.)

Meanwhile, the new payment processing software appears to be quite a fumble. In the last three weeks dozens of members have noticed anomalies in payment processing and have notified prosper about same. You can see these discussed in the comments section of the prosper blog, or on the prospers.org forum. It seems likely that most people don't look at the numbers in detail, so would not notice payment processing errors. If dozens are reporting errors, it seems likely that the snafu is widespread. If you have noticed such problems yourself, please contribute to the discussion on the prospers.org forum.

I noticed one myself, and emailed Prosper on 5/10/2010. I wrote:

I'm looking at note 8324-36. Looking at the note detail, I'm having trouble with some of the numbers.

I don't understand the "principal balance" column on the "borrower payments" tab.

The first April-12-2010 payment attempt drops the principal balance from $80.32 to $47.04, which looks about right. Later on April-12-2010, the payment is reversed, which jumps the principal balance to $142.79 . This is impossible.

Later on April-12-2010, another payment attempt is made, dropping the principal balance to $48.59 . At first I wondered why it didn't come back to $47.04 . Then I realized that the difference between these values is two late fees. But why is the guy charged two late fees for one payment?

Finally, I compared the principal balance column on the "lender accounting" tab to the principal balance column on the "borrower payments" tab, and found that they do not agree! One thing that borrower and lender must always agree upon is the principal balance!

Please advise.

I got a response thanking me, but the problem has not been fixed.

I suggest to all lenders that you look over the arithmetic in any loan where there have been late payments, or in which payments have been reversed. Look carefully at late fees. Look to see after a failed payment is reversed whether the principal comes back to what it was before the payment. Look to see whether the borrower tab and the lender tab agree on the loan principal.

Obviously Prosper installed this new software without adequate testing. Their recovery from this fumble is not encouraging. Have all the good software people left the company?

Meanwhile I wonder if the loan performance data will ever return. Seems quite possible that it is gone forever. This is a sad situation.

I remember three years ago when we had a similar situation on Prosper's collections performance data. I repeatedly pointed out that there were obvious errors in the data. Prosper took the collections data offline with the repeated promise that it would return as soon as some software which interfaced to the collections agency was repaired. Later the web page containing the collections data was removed, and the collections performance data was gone forever.

The best discussion among P2P and Prosper.com lenders is found on prospers.org. I hope to see you there!

Prosper.com - Series D financing analysis

2010-04-20T21:37:00.000-07:00

Prosper has just announced its fourth equity capital round, series D. What follows is a brief analysis of this investment round based on public information.

Prior to the series D round, prosper had 14,752,825 shares of common stock outstanding. (This info from page 82 of Prosper's March 31, 2010 SEC form 10k.)

In the series D round, prosper issued 20,340,705 new shares of common stock for $14.7M. That comes to $0.723 per share. (This info from Prosper's April 20, 2010 SEC form 8K.)

The first thing to notice is that prosper was forced to give away 58% of the company to raise this money. That must have hurt.

How does that price per share compare with prior investment rounds? Here they are for comparison...

04/2005, Series A, 4,023,999 shares for $7,464,450, or $1.875 per share.
02/2006, Series B, 3,310,382 shares for $12,412,301 or $3.776 per share.
06/2007, Series C, 2,063,448 shares for $19,919,009 or $9.692 per share.
04/2010, Series D, 20,340,705 shares for $14,700,000 or $0.723 per share.

In the venture capital business, this is called a "down round". That's one hell of a jump down! From $9.692 to $0.723 is down by a factor of 13.

Although Prosper announced the series D event as a $14.7M round, it brought in only $11.4M of cash. That's because some of the shares in this round were paid for not with cash, but by conversion of the principal and interest Prosper owed on the bridge loans Prosper took out in Nov 2009 and Feb 2010.

If Prosper has continued spending at the rate reported for the quarter ended Dec 31, then it should have about $12.3M in the bank today. I now expect Prosper to begin spending at a greater rate than the December quarter, as it tries to rebuild momentum. If spending increases back to the rate of the quarter ended Oct 31, and revenue stays about the same, then this money would last about a year or so.

Of course I don't know what the future holds.

As always, great discussion among P2P and Prosper.com lenders is found on prospers.org. I hope to see you there!

Prosper.com - backloaded months

2010-03-31T10:16:00.000-07:00

For a long time now, Prosper lenders (those members who lend to others thru Prosper), have observed that a great many Prosper.com loans originate in the last 3 or 4 days of each month. Each month is "back loaded".

The most often discussed hypothesis is that Prosper rushes at the end of each month to push thru any loans that can be pushed thru to make the best possibly monthly numbers. If so, this would be bad for lenders, because Prosper has a number of duties to perform before a loan originates, and lenders want those duties carried out with care. Prosper is supposed to check the borrower against various fraud databases, receive the post card from the borrower verifying their address, and selectively verify other information the borrower has provided. These checks are an important part of fraud protection on which lenders depend. If Prosper is skipping or skimping on these checks during the mad rush at the end of every month, then we'll have a bunch of lower quality loans in the system, and more defaults.

So do we have an end-of-month rush?

I've charted the daily loan originations for the last 5 months vs day of month. Although the chart is a bit busy, you can plainly see that each month is indeed back-loaded.

Now there are several problems with the chart above. First, each month has a different number of days, so the end-of-months don't line up. Second, there are weekends and holidays scattered around, and no loans originate on those days.

To fix these problems, I squeezed out the weekends and holidays, and then slid all the months over so they aligned on the last day of the month, then averaged the five months shown above. The result is this much cleaner chart, showing business days only, and with month-ends aligned.

Yep. I'd say Prosper's months are very much back-loaded. It really does look like the boss walks in when there are about 3 days left in the month and starts yelling that everything must get out the door by month end.

This is the end of another month, and I've updated my loan growth chart. This chart shows Prosper's loan origination by month, so we can see how the business is growing. February was larger than the preceeding month, but still below November '09, and of course well below anything in 2007 or 2008. The last few months have been pretty much a "no growth" scenario.

Today Prosper announced that they're negotiating with investors for a new investment round, which of course we all expected. In fact they must get this done quickly, because they are nearly out of cash. (See my last few writeups for calculations.) It will be interesting to see the details (ie how much did they have to give away) when they emerge in a few weeks.

Tomorrow is the SEC's deadline for the filing of Prosper's annual report (form 10K). At that time we'll learn a bit about how Prosper has managed their cash during October, Nov, and December. (Unfortunately, this document won't tell us anything about January, February, March. )

The best discussion among P2P and Prosper.com lenders is found on prospers.org. I hope to see you there!

Prosper.com - 02/2010 Late Loan Stats Update

2010-03-02T22:01:00.000-08:00

Here's the February 2010 update to to my Prosper.com late loan statistics charts.

The worst month so far is now February '07. Of the loans originated by Prosper.com in February '07, 45.3% have now gone bad. Yipes!

More detail can be found in my earlier posts.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Prosper.com - bankruptcy postponed

2010-02-04T19:43:00.000-08:00

Bankruptcy has been postponed.

At the 11th hour, on February 1, 2010, a group of 6 venture capital firms injected a small amount of money ($2 million) into Prosper.com in the form of a bridge loan. The terms of this loan were (as far as has been disclosed) identical to the terms of the $1 million investment from Nigel Morris on November 10th. These loans will convert to common stock when (and if) someone comes along with the next major chunk of money in the form of an equity investment.

This is a small amount of money on the scale of Prosper's operation. If we assume, as I did in the last post, that Prosper continues to burn cash at the same rate they did between the June and September quarterly reports, this new money is sufficient to keep Prosper operating until April 1st 2010 -- a relatively short time from now. Prosper's management will be working hard to find the next investor before this time is up. I wish them well.

To have a chance of growing to a sustainable revenue, Prosper needs an injection of $20 to $50 Million. Given the difficulties the business has had so far, it seems unlikely that this money will appear in chucks larger than $5 or maybe $10 million at a time. Management has lots of work to do.

While we're on the subject of sustainable business, lets look at how Prosper's loan orginations have grown with time. I estimate that Prosper needs $50 Million/month in loan originations to be sustainable. During the first year, volume grew nicely. After that there were a number of problems, including the SEC shutdown in late 2009.

Unfortunately, Prosper's loan volume after the restart have been comparable to those first months of 2006. Momentum died during the shutdown.

During the first two years Prosper's loan volume was driven largely by PR. In other words, you could see that borrowers came to Prosper after reading stories about Prosper in magazines and newspapers. Every time such a story appeared, you would see a spike in listings. PR is great for a new company, but it isn't sustainable. In the early days Prosper also managed to create an incredible buzz from a highly motivated community. That momentum was killed by Prosper's arrogant attitude toward the community.

For prosper the marketing problem is how to attract growing numbers of borrowers in a sustainable way. (Without PR and without a community?) Prosper has some new folks on board to try to sort this out. Now we get to sit back and see if they solve the puzzle.

And of course if the last 3 years have taught us nothing else, they must attract the right kind of borrowers -- those who will pay you back.

Great discussion among P2P lenders is found at Prospers.org .

Prosper.com is near bankruptcy

2010-01-29T01:21:00.000-08:00

Its no secret. Prosper.com has been hemorrhaging cash. Its all in the public SEC filings.

I'm no accountant, but the numbers really jump off the page. Prosper is near bankruptcy.

Prosper's most recent quarterly report, which reports on the company's condition on 9/30/2009 reported $2,079,624 of cash left. That was down from $4,617,954 in the 6/30/2009 report. During this interval, cash was used up at the rate of $27,591 per day.

If you review the quarterly report, you will note that I have excluded a category called "restricted cash". A footnote explains "Restricted cash consists primarily of an irrevocable letter of credit held by a financial institution in connection with the Company’s office lease and cash deposits required to support the Company’s ACH activities and secured corporate credit cards." Gotta keep those ACH transfers rollin', etc. That restricted cash has to stay where it is. Therefore, I only count the cash that isn't in this restricted category.

Assuming a constant cash burn rate, on 11/10/2009 prosper would have had $948,412 of cash left. On that day, Nigel Morris invested $1,000,000., bringing my estimate of prosper's cash to $1,948,412. But then...

Assuming the cash burn rate stayed constant at $27,591 per day, Prosper would have had zero cash as of 1/20/2010, a few days ago!

I'm not saying prosper is bankrupt now. This is merely what would have occurred under this simple scenario. The inside story is surely more complex.

One would expect that as cash dried up, a prudent manager would reduce staff, defer executive salaries, defer accounts payable (ie pay the landlord late, pay the lawyers late, etc). We don't know whether these things have occurred. If they have taken these prudent steps, then another month or perhaps more is possible.

Simple analysis of the public documents indicates that prosper is in desperate need of cash.

The public documents also tells us about prosper.com's liabilities. The most recently quarterly report lists $434,738 accounts payable, $987,128 accrued liabilities, $281,061 long term debt. Those total to $1.7 million. It seems likely that those liabilities are higher now that it was on the 9/30/09 report date. If so, then zero cash in the bank is really net negative $1.7 million.

Oh but then on 11/10/09, Nigel Morris' invested $1,000,000 in the form of a "bridge loan" (per SEC filings), so that increased liabilities to maybe $2.7 million. That money is surely now spent (see above calculation).

Having zero cash and at the same time $2.7 million in liabilities is quite serious.

You may also notice that I haven't counted the loans or notes (two sides of the same coin) that prosper issued after their restart in 2009. That's because these as far as cash flow is concerned, these two items net out. For every loan prosper makes, there is an equal amount of notes issued to lenders.

I haven't tried to calculate what would happen if a bankruptcy were to occur. I've simply calculated what appears to be happening in the operation of the ongoing business.

There are now two possibilities. We could see a new investment of several million in Prosper during the next few weeks, which would breath new life to their balance sheet, or we could see bankruptcy.

Would be a shame to see this great idea go down. With cash in the bank from a new large investment, and new management, I might even become a customer again.

I'm no accountant, but golly gosh, it sure looks like the situation is coming to a head.

The best discussion among prosper lenders is always found at prospers.org

Prosper.com - 12/2009 late loan stats update

2010-01-03T21:59:00.000-08:00

Here's the December 2009 update to to my Prosper.com late loan statistics charts.

The worst month so far is still October '06. Of the loans originated by Prosper.com in October'06, 44.2% have now gone bad.

Feb '07 is comin' up fast with 43.9% gone bad so far.

More detail can be found in my earlier posts.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Prosper.com - 11/2009 late loan stats update

2009-12-05T00:48:00.000-08:00

Here's the November 2009 update to to my Prosper.com late loan statistics charts. Toward the end of this article, I have included some comments on recent events at Prosper.com.

The worst month so far is October '06. Of the loans originated by Prosper.com in October'06, 44.2% have now gone bad.

October'06 is not alone. Many other months have produced similarly bad performance.

More detail can be found in my earlier posts.

I've started charting some of the loans originated after Prosper's SEC-sanctioned reopening. There weren't enough loans originated in July'09 to make useful statistics, so I've started with Aug'09. In July'09, Prosper raised the borrower credit score cutoff from 520 to 640, a huge change. With these new restrictions on borrowers, the new loans in aggregate should go bad at a much lower rate (ie lower slopes on the new curves). Too early to know much, but the first couple of points do seem to indicate the new loans doing much better.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

Many of the very early posts in this blog are still on point, and provide background on prosper, from a lender's perspective. If you're new to this, please read old posts before sending questions.

There have been several interesting developments at Prosper.com during the last month.

As many of you know, Prosper is a startup, burning thru venture capital, and near the end of its cash. As a result, Prosper needs a substantial new injection of cash within the next 6 months, or else. It was therefore a welcome development when Prosper announced that on November 11 Nigel Morris, a co-founder of Capital One, had made an investment in Prosper. Examination of SEC filings shows us that this investment was only $1 million, a very small amount, and also that this investment was in the form of a bridge loan, at 15% interest, and came with a warrant kicker and a position on the board of directors. This investment is not the substantial investment we've been waiting for. Its just a bridge. Bridge to what we're not quite sure. Does the appearance of Morris signal the beginning of a change of control?

On November 11, 2009, Prosper filed its official quarterly report (10Q) with the SEC. This latest 10Q shows that prosper is burning about $2 million of cash per quarter, and had about $2 million of cash left as of Sept 30th. (Of course the Nigel Morris $1 million was added after Sept 30th.)

In late November, Prosper's chief marketing officer, Catherine Muriel, left the company. Muriel was an embarrassment. Her only visible work was authorship of many of Prosper's official blog entries, on subjects such as thanksgiving leftovers and recommendations to buy Christmas gifts at spencers online, a company that sells pranks such as tear-proof toilet paper, and lets not forget the four part series on online dating. (See the forum thread Crazy Muriel Blogs Again.)

On December 2, 2009, Prosper announced the arrival of Nick Talwar as their new "chief revenue officer". I had never heard the title CRO before. A little research indicates that this title generally includes responsibility for "revenue". I thought that was the CEO's job. Maybe its just a fancy name for the marketing guy. In any case, investors haven't heard from Talwar yet, so we can't yet judge what he's going to accomplish.

On December 2, 2009, Prosper dismissed its accounting firm, Ernst & Young, and hired the much much smaller firm of Odenburg, Ullakko, Muranishi & Co. Although some may find this sinister, I take Prosper's word that this change was made to save money. I don't know anything about OUM, but you can see some of their smiling faces here.

PS: The best discussion among P2P and Prosper.com lenders are found on prospers.org. See you there

Prosper.com - Paradise Lost; Deadbeats Won

2009-11-04T20:08:00.000-08:00

It was a hot Saturday afternoon, August 5th 2006. I was driving to Long Beach to have dinner with a bunch of folks -- 25 fellow Prosper.com lenders -- who I had never met.

That's not quite true. I had met them over the internet. For several months I had been vigorously corresponding with these folks (day and night) as we worked hard to decipher the risks and necessary disciplines for lending money to anonymous strangers via the internet. We were spending several hours a day reviewing loans, corresponding with borrowers and each other, doing statistical studies, debating our hypothesis about what makes a good borrower. For example.. Historical data said that "homeowners" are better risks, but would that still be true now that housing lenders had gone nuts and strange people were buying with no money down and flipping homes left and right? There seemed to be a million such issues, and a lot of different opinions on each one.

Was I nuts? I had never done anything like this before. A face-to-face meeting with people I knew only by pseudonyms (their Prosper screen names)?

I drove 100 miles, but some came from much larger distances. Prosper CEO Chris Larsen flew down from San Francisco. One lender flew in from New York.

The get-together was arranged by a fellow lender I knew only as DebinVenice. She gave me an address and said "I'll be standing under a big horse." As I drove past the Queen Mary I wondered if there would be a horse or a woman standing under it or what that even meant. (I had never been to a P.F. Changs, so I didn't know they all have giant horse statues out front.)

Sure enough Deb was standing under the horse with a small crowd when I arrived. I felt like I knew all these people. After all we had spent hundreds of hours talking online. Online we had talked mostly about specific borrowers, and various Prosper technical issues and frustrations but by this time we knew a lot about each-others' politics, family life, etc. We did not however know what each other looked like. Screen names don't give you much of a clue about who is male or female, who is black or white, short or tall, etc, and the mental images I had formed needed considerable adjustment.

One couple walked up to me (seeing the screen name on my badge) and thanked me for bidding on their loan. Wow! Borrowers in the flesh! Unexpected. It seemed very personal.

This was the time of the most amazing excitement for the early batch of Prosper lenders.

I remember sitting across the table from Prosper CEO Chris Larsen, as he explained how tough he was gonna' be on fraud and deadbeats. He was gonna make an example of these folks, so borrowers would know that Prosper is tough.

Chris Larsen, CEO of Prosper.com (center) talking with lenders (folks who lend money to strangers over the internat via Prosper.com) over dinner, Long Beach, August 5, 2006. (Photo credit DebinVenice)

This was pretty much the time of peak excitement. What I mean is that lender enthusiasm went downhill after this time. Those folks around that table were the wildest imaginable supporters and advocates for Prosper.com, but none of the folks I sat with at that table (with the exception of Chris Larsen) are still lending via Prosper. Something went wrong.

To those of us who were actively participating, observing how borrowers interacted with lenders, observing how loans were performing, some problems became clear. The population of Prosper borrowers was obviously heavy with fraudsters and deadbeats. A tremendous amount of animosity developed when specific examples of borrower fraud and dishonesty were exposed by lenders time and time again, and Prosper management just didn't want to hear it. Lenders who made the "mistake" of exposing such fraud were routinely censored and censured by Prosper management. Chris Larsen "shot the messenger" instead of learning about the problem and taking action to fix it.

I've written much about the rate at which Prosper loans are going bad. To get some historical perspective, lets look back at the guidance Prosper gave lenders in those early days. Prosper published statistics which developed from credit bureau Experian's experience with credit card customers. The purpose was to help lenders understand the Prosper credit grades, which at that time were just highly quantized Experian credit scores. This data showed that borrowers in Prosper's "AA" credit grade would be expected to default at the rate of 0.20% per year. What actually happened is that loans to AA borrowers went bad at a rate of about 5.00% per year. Wow! That's 25 times worse than Experian's vast experience seemed to predict! Somehow Experian's credit score and their historical credit experience didn't quite predict the behavior of Prosper borrowers. (Note: You can see how "AA" credit grade loans have performed by looking at rateladder's graphs. Find the 1 year point on the X axis and look at the "AA" curve.)

Experian's experience didn't provide the right insight, from which we conclude...

Apparently Prosper attracted a "different" crowd.

Making a successful business in P2P lending requires that you understand this fact. If Chris Larsen had taken the time to realize what was happening, he might have put in place superior fraud checks, serious verification steps, a serious collections department, etc, as appropriate to deal with the substantial fraction of fraudsters and deadbeats who were attracted to Prosper, but that was not to be.

I'd love to give you the details (ie names) and amazing stories of specific deadbeat Prosper borrowers who stiffed me personally. Anecdotes often communicate better than statistics. I won't, because giving you personal information on these borrowers could be interpreted as violating the terms of the lender agreements I signed with Prosper. One of my deadbeats was a former state senator from New Hampshire who is still routinely quoted in the political press. (Rated "A" by Prosper.) One of my deadbeats wrote a book on how to avoid collection agencies! He sells it on the internet! Man that's a deadbeat's deadbeat. (Rated "AA" by Prosper.) Both these guys are highly visible. Its not like all Prosper deadbeats have skipped town. Some sit right in front of your face and don't pay. You'd think that with highly visible people like this stiffing Prosper's lenders, management would want to take some action. Maybe sue some people. Get serious. No, they just had a collection agency call them repeatedly on the phone. Damn weak effort.

In late 2007, Prosper hired a collections expert, Doug Fuller, as VP of Operations. Prosper introduced this new employee as if he were an attack dog who was going to eat deadbeat borrowers for lunch. On October 2, 2007, Prosper published an "interview" of Fuller by a fellow Prosper employee. This was published on Prosper's official forum, on Prosper's web site, but has since been deleted. Fortunately, some lenders kept a copy, and you can read it here. I'll quote a few snips, but you should read the entire interview for yourself. It paints a strong image.

Q: Do you have experience with suing people?
A: Oh yes. Between First Select and Credigy, I have been responsible for making the decision to sue more than 150,000 people. There are a lot of lawyers that can’t claim that number of suits in a lifetime.
...
Q: Okay, so you need to decide who to sue, then what? A: Put quite simply, my philosophy is this – if you won’t pay, but can (or will in the future) be able to pay, I’m going to sue you. If I sue you I’m going to win.

Q: That sounds kind of arrogant, can you back it up?
A: Courts in seven states have recognized me as an expert at consumer debt litigation. At Credigy, if a case got really nasty, I would go testify live. I refuse to lose.

Q: Really? What’s your win/lose record? A: In my last 18 months at Credigy, I testified live at 42 trials. My record was 41-1. By the way, I fired the law firm where we lost.

Big hat, but is there cattle?

In January 2008, Fuller selected 66 loans out of the 1800 Prosper.com loans that had defaulted by that time, and he organized a "legal test" in which he would sue these 66 borrowers, and demonstrate that he was able to produce results like the ones he described above. Fuller personally selected these 66 loans. Fuller told us that he picked loans where he believed he had good contact information on the borrower, and where the borrower had the ability to pay. Presumably he also took care to choose loans where he believed he had the best chance to win. (He did not include my state senator or deadbeat's instruction manual author.)

Although Prosper kept the status of this project secret, many courts publish information about ongoing lawsuits, so lenders were able to observe that the lawsuits were not going well. I wrote about this in October of 2008. What I observed is that many of the suits were being dismissed! We couldn't tell exactly what was going wrong, because courts publish limited information.

Some of the lawsuits were dismissed by the court because Prosper was never able to find the deadbeat borrowers to serve them. Oops. Other borrowers were served (ie were found), but the cases were later dismissed by the court. Some suits were being dismissed at Prosper's request! Something more was going wrong. It was mysterious. Sure looked like Prosper was just pulling the plug. Lenders wanted information, but Prosper would not tell us what was happening.

The legal test was a horrible failure. Prosper demonstrated that it doesn't know how to collect on late loans even when it tries, even with expensive lawyers helping. How could this be?

Prosper has been mute on this subject -- for almost two years -- until a few days ago, when Doug Fuller wrote about the results of the legal test project in Prosper's official blog. (Because Prosper has often deleted their blog entries which proved embarassing, I point out that a copy of Fuller's writeup is archived here.) Its a worthwhile read.

Now we know some of the numbers, and more about what went wrong. In summary: Everything went wrong. It is as it appeared. The legal test was a horrible failure. What's worse, to most observers it seems obvious that every step could have been carried out in a much more competent fashion. It was a three stooges operation.

Here's what we learn by reading Fuller's recent admissions. (I'm not the first to dissect Fuller's writeup. I follow the outline given by Prosper lender ira01 here. Read ira's message for more technical legal details.)

They started with 66 hand-picked charged-off loans. Of these, they discovered that 3 borrowers had moved to a different state, so they gave up. (Mind you, it is possible to sue in all 50 states, but Prosper just gave up, preferring the convenience of only suing people resident in Prosper's home state: California.)

Next there were 13 loans where Prosper's legal team was unable to locate the borrower, in order to "serve" him, so they gave up. Its pretty outrageous that 13/66 = 20% of his hand-picked borrowers can't be found.

What did they do to find these people? They don't say. It is possible that they did nothing except try the address they had on file. Fuller offers the excuse that in his experience, the address shown in Lexis is usually accurate, but wasn't in these cases. I guess Fuller believes these people just vanished without a trace. Given Fuller's background, we expected him to be skilled at skip-tracing, or know how to hire someone who was.

Doug offers the observation that Prosper borrowers don't seem to fit the pattern of his prior experience. Here I agree. Prosper borrowers are different. Two years after he joined us, he's beginning to figure it out.

One possibility is that these 13 people never existed. Prosper.com has an obligation to purchase "identity fraud" loans from the original lenders, therefore they don't like to consider this possibility.

There's something else fishy about giving up on these 13 borrowers. In California, if after diligent effort you haven't been able to find the defendant to hand him the paperwork, you can satisfy the requirement for service by printing a notice several times in a newspaper. This allows you to proceed with a suit, and hopefully get a default judgment against the deadbeat, even tho he's hiding from you. Then when you do find him later, you have a legal advantage. Apparently this was too hard for Prosper, so they gave up instead.

Doug then tells us that in 21 more cases, the borrowers filed bankruptcy after Prosper filed suit! Doug also tells us that is a huge unexpected number. Another clue that Prosper borrowers are different.

I do wonder about those 21 bankruptcies. In the past there have been some cases where a borrower told Prosper that he had filed bankruptcy, and Prosper took the borrowers word for it, when in fact there was no bankruptcy. I wonder if they actually checked these cases with the court. I also wonder whether Prosper has filed paperwork with the bankruptcy courts in these 21 cases. Perhaps we'll figure out how to track down these bankruptcies (or lack thereof) another day. (After all, we know the names of most of the defendants, because we found them while searching court records to track down the status of these lawsuits during the 2 years when Prosper was silent.)

66 minus 3 minus 13 minus 21 ... just 29 loans left.

More than half the suits died before they even got started. Remember Fuller's words? "I’m going to sue you. If I sue you I’m going to win. "

At this point Fuller stops giving us precise numbers. He proceeds to explain a number of different things that went wrong, and the fact that he's unhappy about them. He's not the only one.

A typical early step in this kind of lawsuit is to ask the court to grant a "default judgment", meaning that the facts are so clear that there isn't any use wasting time with a trial. (Default judgements are common when the defendant doesn't bother to show up, etc.) Doug explains that they had a little trouble with this: "the vast majority of courts rejected the requested Clerk’s Judgment." Well huh. He doesn't explain why. Dude, we want to know why, because there's something very wrong here. Maybe you should diagnose the problem and fix it. Maybe you guys are putting the carbon paper in backwards.

And a clerk's judgment is just the easiest kind of default judgment. If you fail that, there's another kind you can apply for. So we expect, well you know ... follow-thru. Fuller says that as he was getting ready to do that, Prosper entered its "quiet period", because of Prospers SEC filing, intended to straighten out the regulatory issues Prosper had with their lenders. Fuller decided to not proceed with the necessary court filings during the quiet period. Well the quiet period lasted nearly a year, so this was quite an interruption! Prosper missed legal deadlines and the courts dismissed most of the remaining cases.

There is a bit of a hole in this story. Prosper filed their first S1 with the SEC in October of 2007, before the legal test project had even started! Another hole in this story is the fact that the registration with the SEC has to do with the relationship between Prosper and lenders, and has nothing whatsoever to do with borrowers. I know Fuller agrees with me on this point, because he has used this argument himself. In an earlier blog entry, describing one case which he won, he tells us that the defendant (borrower) raised the issue of the SEC boondoggle, and Fuller was able to counter with an explanation that the SEC matter didn't affect the relationship between Prosper and its borrowers. Given that the courts hearing these cases had no problem with the SEC entanglement, I can only presume that it was overcautious lawyers advising Prosper on the SEC matter who told Doug to shut down. They harmed lenders by doing so.

Doug says he's going to try again on some of the cases that were dismissed. I'm glad to hear it. He didn't say when. We've blown two years on this "test" so far, and we have nothing to show for it.

By the way, we've been out of the quiet period for several months now. If the quiet period was the thing keeping Fuller from proceeding with legal action, he should have fired up the suits again by now, but he has not. I question his intent.

Well, at least they did win at least one case out of 66.

Many times we've been told they were going to treat nonpaying borrowers seriously, but looking back these statements have never been truthful.

While they're firing up the 2nd try on many of the dismissed lawsuits for this initial batch of 66 borrowers, there now are another 7,933 that's right seven thousand nine hundred and thirty three Prosper borrowers who have defaulted on their loans, with nobody even thinkin' about legal action on any of these folks. There is simply no credible story that they're ever gonna get any material legal action going against deadbeat borrowers.

What have we learned?

Prosper borrowers are "different". While most of them are very nice people, like the couple I met in Long Beach, a substantial fraction of Prosper's borrowers are hardened deadbeats, attracted by the sweet odor of naivete. Prosper lenders cannot succeed without better mechanisms to protect against against these zombies.

Deadbeat borrowers are a big problem.

Prosper has a Three Stooges legal strategy.

Prosper management has never taken these issues seriously.

Prosper management's talk about how they would handle deadbeats has been hot air from the very beginning.

It was such a wonderful concept. It seems such a shame.

In order to stay alive, Prosper.com needs a new round of venture capital funding some time in the next few months. If I were one of the VCs considering an investment, I'd be lookin' to replace Chris Larsen. Mr VC, if you're reading this, that is what I suggest you do.

PS: Great discussion among P2P lenders is found at prospers.org .

Prosper.com - Don't blame the economy

2009-10-11T19:59:00.000-07:00

From time to time, someone will try to explain away the poor performance of prosper.com loans by blaming it on the poor economy. Its become a national pastime to use the economy as an excuse these days. But is it true?

To sort this out, I have graphed the default rate of all prosper.com loans side by side with the U.S. unemployment rate. If bad economic conditions cause prosper borrowers to change their behavior, then you should see the prosper.com default rate go up when unemployment goes up, and vice versa.

These two curves don't look correlated at all!

In the last year, unemployment has roughly doubled, which represents a huge change in economic conditions. During that time the default rate on the prosper portfolio has bounced around, but it certainly hasn't gone up in tandem with the unemployment rate.

In a recent blog, Prosper's CFO Kirk Inglis was describing Prosper's new system for rating borrowers, and he said "...the historical performance that underlies the Prosper Rating System is derived from a poor economic environment. As a result the estimates of loss are biased higher than if the economic environment had been more benign."

In other words, he argues that because he did his calculations using loan data from the recent past, when economic conditions were bad, then surely future loans should do better than his model predicts. His unstated underlying assumption is a correlation between prosper loan performance and the economy. I see no evidence for his conjecture. Wishful thinking.

It may seem counter-intuitive, but we can't deny the data. Loan payment performance doesn't seem to track economic conditions.

Boring methodology footnotes: To compute the instantaneous default rate of the entire prosper portfolio, I looked at prosper's performance web page. I asked it to show me all loans (for all time) as observed on the first day of each month. I copied down the number of loans that had defaulted as of that date. Subtracting these numbers for two adjacent months tells me the number of loans that defaulted during that month. To convert this to a default rate, I divide by the total number of loans prosper had originated as of four months earlier.

I chose the four-months-ago total because loans take four months to default. Using a later total would have included loans in the denominator which could not possibly appear in the numerator. Finally, I converted this monthly default rate to an annualized default rate exponentially, ie da = 1-(1-dm)^12 .

This process produces an instantaneous "whole prosper portfolio" default rate. Beware that this number doesn't help us judge the performance of loans prosper originated at any point in time, or at any credit grade, becaue here they are all mixed together. It does allow us to observe trends (if any) in borrower payment behavior over time, so it seems appropriate for this inquiry into how borrowers behave during economic hard times.

You probably note a downward tilt in the default rate curve during the months that Prosper was shut down by the SEC. This is a side effect of the loan portfolio "aging" during that period. No new loans were being added, and the existing loans were all getting older. Therefore the age distribution of loans in the prosper portfolio was changing. This aging produces a lower default rate, because the default rate naturally falls somewhat as loans age. This happens because the portfolio is a heterogeneous mix of loan quality. The bad loans (think HR, E, D, ...) tend to fail early, leaving a more aged portfolio with a higher quality mix.

The unemployment rate shown is the whole-country U-1 series produced by the bureau of labor statistics, and which I obtained from www.economagic.com . This is the unemployment rate that you most often find quoted in the press.

PS: The best discussion among P2P lenders can be found at prospers.org .

Prosper.com - 10/2009 late loan stats update

2009-10-04T15:52:00.000-07:00

Here's the October 2009 update to to my Prosper.com late loan statistics charts.

The worst month so far is October '06. Of the loans originated by Prosper.com in October'06, 43.5% have now gone bad.

I'll show that calculation as an example: In October '06, Prosper originated 743 loans. Three of these loans later disappeared from the stats Prosper provides. Prosper's stats now show having originated only 740 loans in October '06. The difference, 3 loans, presumably are loans that were repurchased by Prosper because of identity theft, but we don't know for sure. I count those 3 loans in the set that have gone "bad". Prosper reports that 307 of their October'06 loans have now defaulted. Finally, Prosper reports 13 of these loans are now in the "1 to 3 month late" category. I then calculate (3+307+13)/743 = 43.5% gone bad.

October'06 is not alone. Many other months have produced similarly bad performance.

More detail can be found in my earlier posts.

New tidbits this month: Two of these curves are "done". The May'06 and Jun'06 originated loans are now all either in the "paid off" or the "charged off" category. With no borrowers active, the numbers have reached their final resting place. I've decided to make the curves end when this happens, rather than continuing a long horizontal line into the infinite future. You can see this more plainly on the larger version of the chart.

I've started charting some of the loans originated after Prosper's SEC-sanctioned reopening. There weren't enough loans originated in July'09 to make useful statistics, so I've started with Aug'09, which makes its first appearance this month as a single dot. In July'09, Prosper raised the borrower credit score cutoff from 520 to 640. A huge change. Therefore the new loans in aggregate should go bad at a much lower rate (ie lower slopes on the new curves). We'll see.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

From the chart you can see that about 5% of grade AA loans went bad during the first year of the loan, etc. That's useful information. In the early days of Prosper.com, prosper used to give lenders statistics from Experian that showed Experian's experience of a 0.20%/year default rate for grade AA borrowers. Unfortunately, that data came from credit card accounts, which we can now see don't behave anything like Prosper loans!

I recently asked rateladder whether he would be updating his charts now that prosper is running again. He says does not expect to do any more updates. That's a shame. Rateladder has published the SQL code he wrote to produce those charts. You can grab his code, download the database from Prosper, and run those calculations yourself. (Only works for database / SQL experts.)

The 2nd reason I'm not charting loan performance by credit grade is that credit grade is just one criteria. There are many variables you can use to choose borrowers. Most lenders use some combination of more than one variable. (Example: Credit grade A or better, no past delinquencies, and doesn't mention religion in the writeup.) I can't chart all combinations.

I do believe there's value in observing the behavior of Prosper.com loans in aggregate, even if that doesn't give lenders insight into exactly how they should pick loans.

In the early days of Prosper, it was common to hear a wide variety of speculations and myths about borrower behavior. These charts provide the data to understand whether some of those speculations were correct.

Example: "Once you get two or three payments made, the loans are good." I used to hear this all the time. Turns out it is not true. There's no bump in the default curves at the beginning. They're pretty smooth. Loans go bad over time.

A common myth you hear recently is that borrowers are defaulting a lot because of the recent bad economy. It ain't so. Look at the curves. (Look at the top chart above.) The horizontal axis is calendar date. If borrowers were behaving very differently now (during the recession and high unemployment) than they did earlier (say last year) you'd see it in this graph. You would expect ot see the curves bend upward as unemployment rose. Didn't happen.

PS: The best discussion among P2P and Prosper.com lenders are found on prospers.org. See you there!

Prosper.com - Don't Mislead Investors

2009-09-24T13:05:00.001-07:00

That was the subject of my very first blog about Prosper.com. Sadly here I am again two years later discussing the same subject.

During Prosper's lifetime, a great many newspaper and magazine articles have contained misleading statements about the quality of Prosper.com loans. It just seems to happen again and again. That was in fact the impetus for this blog. I wanted to counterbalance the misinformation. More about history later. Lets start with the most recent outrage.

An article in the 9/19/09 Washington Post, said "Prosper's default rate is about 5 percent." That statement is bunk. Prosper loans are far worse than that. The difference between what was printed and reality is important to investors, because it makes the difference between profit and loss.

As many of you know, I've tracked Prosper loan performance for several years, and you can see from the charts I publish that Prosper loans go bad much faster than this. But lets start with a more authoritative source than me: Prosper's most recent prospectus filed with the SEC.

The prospectus says: "As of March 31, 2009, of the 29,000 borrower loans, ...5,840 loans or 20.1% had defaulted. " Well, that doesn't directly tell us a default rate, because the 29,000 loans outstanding are spread across a wide range of ages. Loans go bad over time, and many of these loans haven't had much time to go bad yet. Still, it doesn't take a genius to see that you can't get a 5% default rate from 20% of the pool having already gone bad! The Washington Post article is clearly in conflict with the prospectus.

The statement in the Washington Post is misinformation, just like the many similar examples of misinformation which have preceded it.

If we separate out Prosper.com loans by age, the facts become clear. The following chart shows Prosper.com loans broken out by month of origination, and you can clearly see that the early (ie old) cohorts are headed toward about 40% of loans going bad. The younger cohorts are doing a little better, as I've discussed before. Still they are similar. These are 3 year loans. If 40% of them go bad over 3 years, that's equivalent to roughly a 16% per year default rate. The Washington Post article is bunk.

Click on the chart to see a larger clearer version.

Now lets go back and visit some of the prior examples of misleading press. You may see a pattern. I'm sure I haven't caught this lie every time it has appeared in the press. A few should do to let you appreciate the pattern.

I first wrote about this in my very first blog entry on April 20, 2007. I was an enthusiastic Prosper investor at the time, and believed I could sway Chris Larsen's behavior by just getting the facts out to the public. Turns out I didn't have much influence.

In that blog, I wrote about an April 1, 2007 article about Prosper in the Baltimore Sun. (The article is so old now that they make you pay to read it, but you can read the abstract for free, and the abstract contains the Chris Larsen quote of interest.)

This article quotes Chris Larsen... "Larsen says the default rate - payments 120 days past due - is about 0.50 percent. But that will likely climb as the three-year loans mature, he says."

Even back then, with limited data at my disposal, I was estimating a total Prosper.com default rate around 17%/year. (I said so in my first blog entry.) That is so horribly different than 0.50% that I just couldn't imagine how Larsen could say that sort of thing to the media.

When you're a young loan company, it is easy to point to the portfolio and say "Look, not many of our loans have defaulted!" Of course that isn't what matters. What matters is the rate at which loans are going bad. Prosper doesn't default a loan until it is 4 months past due, and the first payment doesn't become due until 1 month after the loan originates, so loans younger than 5 months don't give you any defaults, and at the time of that article, most of Prosper's loans were very young. However, given the data available at the time, anyone could see, without any analysis, that Larsen's statement was incorrect. Even letting the various ages of Prosper loans be mixed together, Prosper's own data shows that on April 1, 2007, they had originated 9003 loans, and of those, 291 had already defaulted. That's 3.23% . How can you possibly get from that number to a claim of a 0.50% default rate? You can't.

I thought perhaps if I exposed this sort of thing, the misinformation would stop. It did not.

There was an AP/MSNBC article on Nov 27, 2007 "Prosper’s default rate hovers at about 2.7 percent, Larsen said, but that figure is expected to rise as more loans mature." This was misinformation.

By that time, even using the most simple possible method of dividing the number of already defaulted loans by the total number of loans would tell you that 9.15% of prosper loans had already defaulted, and remember a great many of those loans were so young they could not possibly have yet defaulted.

If, using Prosper's own data again, observing on Nov 27, 2007, we take out the loans so young that they could not possibly default, then we have 1502 defaults out of a total of 12035 loans. That's right, 12.48% of loans old enough to meet the 4-month-late criteria for default had already in fact defaulted!

The simplest possible calculations tell you that Chris Larsen's quote is terribly misleading.

The true default rate, ie the rate at which loans were going bad could be easily estimated by looking at the slope of the curves on my charts, and this told me loans were going bad somewhere in the range of 15% to 20% per year. How could he say 2.7% to the press? ...and thereby the investing public?

There was a Dec 16, 2007 article (now expired) on Yahoo news which said "The default rate on Prosper loans is a meager three percent." They probably just copied from the AP article. The misleading information echoes and repeats over and over.

Chicago Tribune article of 01/13/07 talks of a 4.7% default rate. (Article may be offline now. The links I had no longer work.)

The long series of misinformation continues with the recent Washington Post article's statement "Prosper's default rate is about 5 percent."

No my dear. Prosper's loans have experienced a default rate of something like 17% per year. As anyone can plainly see from my charts, about 40% of Prosper.com loans go bad over their 3 year life.

When you're loaning money to someone, especially someone anonymous, your estimate of the default rate is really important. It is the most important piece of information you use to judge what interest rate to charge the borrower. That's why I began tracking the numbers. I was an enthusiastic early Prosper.com investor, and I wanted to understand.

On Prosper.com, lenders must rely on their understanding of historical default rates.

The continued material misrepresentation of this important data in the press, apparently driven by interviews with Prosper's CEO Chris Larsen, is disturbing.

PS: Great discussion among P2P investors can always be found at prospers.org

Prosper.com - 09/2009 late loan stats update

2009-09-18T01:46:00.001-07:00

Here's the September 2009 update to to my Prosper.com late loan statistics charts.

Prosper loans created in the worst month so far, October '06, are now more than 43% bad! This number could still go higher! These are 3-year loans, but we don't know the final number of loans that have gone bad until 3 years + 4 months after origination, because loans are "charged off" when they are 4 months late. On March 1, 2010 we'll know the final numbers for loans originated in October 2006.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

Many of the very early posts in this blog are still on point, and provide background on prosper, from a lender's perspective. If you're new to this, please read old posts before sending questions. Thanks.

The basic fact about Prosper.com loans so far is that about 40% of the loans go bad.

Something unexpected happened this month. The Securities and Exchange Commission has begun to disclose (on their web site) some of the correspondence between the SEC and Prosper while Prosper was attempting to get SEC approval to reopen. I've not seen such correspondence released before, but it seems like a great thing.

From some of these documents we learn that the SEC reads Fred93's blog! A few issues that have often been discussed here are mentioned, and in one place Fred93's blog is referenced by name.

Here are some snips from a June 12 2009 letter from SEC to Prosper:

"We note analysis of the prosper loan originations posted by prosper members which shows loans that are not paying according to their terms approaching 40% for your oldest tranches."

"...there have been concerns expressed about the number of reported loans that closed during a particular month changing. ... Please refer to http://fred93blog.blogspot.com ."

Right on! I was surprised but pleased to learn somebody reads this stuff.

To see the correspondence, go to the SEC's list of Prosper.com filings, and scan thru pages and pages of documents looking for the keyword "UPLOAD" in the first column. Only the letters from the SEC to Prosper are available, so this is like listening to only one side of a conversation. (I wish I could see Prosper's answer to the # of loans originated changing over time issue. I asked Prosper about that myself several times, but never got an answer.) Still reading the SEC letters is quite educational. The SEC really got into the details.

PS: The best discussion among P2P and Prosper.com lenders are found on prospers.org. See you there!

Lendingclub - 09/01/2009 Late Loan Stats Update

2009-09-05T22:16:00.000-07:00

These charts show statistics for the performance of all Lendingclub.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Lendingclub's performance web page.

The curves are "noisy" (ie they jump up and down a lot) and are not as orderly as the curves on my charts of prosper.com loan performance. That's because the volume of loans at Lendingclub is still too low to get really good stats.

Lets slide these curves over to a common origin, so we can compare their shapes ...

Just look at where these curves crossed the 390 day line, (ie 30 days after the 360 day line, because it takes 30 days for a loan to become 1 month late) or visualize where they might cross the 390 day line as they extend, and that tells you what fraction of loans went bad in the first year. This is then an estimate of the annual default rate for Lendingclub loans.

Loans originated during the first few months of lendingclub's operation have performed very poorly. Oct, Nov 2007, and Jan 2008 have had about 15% of loans go bad during the first year. This is similar to the performance of Prosper.com loans.

Loans originated in later months have performed much better. This gives investors some hope, but...

Why have Lendingclub's later loans performed better than earlier Lendingclub loans? It seems that Lendingclub management must have learned some things and improved their verification criteria. Perhaps they learned how to filter out more of the identity theft or professional deadbeat borrowers. Unfortunately, I don't know what they changed. That makes it difficult to have faith that the improved quality of loans will continue.

The best discussion among P2P lenders occurs at http://www.prospers.org/forum/. See you there!

Prosper.com - Its a Deadbeats' Party

2009-08-23T12:10:00.001-07:00

Apologies to Oingo Boingo. I borrowed that title from one of their songs.

Now on to Prosper.com, and the sad story of "Post Charge-Off Collection Techniques".

Of great concern to folks who lend thru Prosper.com is just how hard Prosper actually tries to collect loan payments from borrowers. Sadly they don't try very hard at all. I've written about this before, so I'll skip much of the history, and just talk about recent revelations, and some juicy revelations they are!

Here are some links to some prior discussions:
May 6 ,2007 Collections is Broken
October 14, 2007 Collections Still Wanting
July 26, 2008 Collections: You have forsaken lenders

Remember that while lenders supply the money, Prosper.com takes full authority and responsibilty for servicing the loans. That means only Prosper.com can take collection actions. Only Prosper can remind borrowers to pay. Only Prosper can hire collection agents. Only Prosper (or their agents) can call the borrower, knock on their door, etc. Therefore, if Prosper doesn't do these things well, or doesn't do them at all, then money doesn't get collected, and lenders lose. With that in mind, we're gonna discuss what happens to loans that go very late.

Originally, Prosper.com loans that went 4 months late were declared "in default", and were sold by Prosper to a junk debt dealer. This action was codified in a contract between Prosper.com and lenders called the "lender agreement".

But then one day in May of 2008, Prosper decided to stop selling these loans to junk debt dealers. The decision was unilateral, without the consent of lenders, and in violation of the lender agreement. Lenders at the time scratched their heads about Prosper's willingness to ignore the contract, but lenders didn't raise a legal fuss. Prosper after all argued that they were going to do something even better than sell to junk debt dealers. They were going to apply "Post Charge-Off Collection Techniques"! Hallelujah, lenders thought. They're finally gonna get serious!

In May of 2008, Doug Fuller of Prosper wrote on the official Prosper.com blog:
We believe the prudent course of business is to not sell at this time. Instead, we are going to consider the loans as charged off, and keep them and continue to try to collect them as charged off debts. You will continue to own the loans as we apply post charge off collection techniques to these accounts. We recognize that this is different than our normal process, but firmly believe that it will result in a higher return for our lenders.

Lenders mused ... What the heck are these "post charge off collection techniques" anyway? We coined the acronym PCOCT. What the heck is PCOCT? In our fantasies, big knarly biker bar bouncer guys knocked on borrowers' doors and politely asked for payment. In the back of our minds we suspected that PCOCT meant precisely "nothing". In spite of much prodding from the lender community, Prosper never defined PCOCT, and in fact never said anything at all about it. ... until now.

More than a year later, August 2009, Doug Fuller of Prosper wrote in the official Prosper blog
Starting now, our plans relative to charged off accounts are as follows:
1. We continue to monitor the distressed debt market and to see if a sale is a possibility.
2. Until such time that the expected sale price exceeds the projected net recoveries for the first 12 months after charge-off, we are not going to sell.
3. We are going to place the accounts with a collection agency that specializes in charged-off accounts (the first agency has been identified and the contract is in the works).
4. The agency is going to employ a settlement strategy with settlement authority based on age, charge-off balance and current credit score. For post charge-off accounts, this is the best strategy to maximize total dollars recovered.

Well that was a letdown. Remember that more than a year has passed since Prosper began putting our loans into the PCOCT basket. It is shocking therefore to see this official statement discuss collection actions in the future tense. We "are going to" place the accounts... The agency "is going to" employ a settlement strategy...

In other words, in the more than a year since Prosper began throwing our loans into the PCOCT pile, Prosper has not hired an agency to carry out the post-charge-off collection techniques plan. In line with lender's worst fears, the true meaning of PCOCT was "The loans just sit in this pile here, and we don't do anything."

This is not an idle issue, because as you can see from the late loan statistics charts I publish almost every month, about 40% of Prosper loans go bad. That means we're talking about what happens to 40% of Prosper loans. And what happens is that those 40% of loans go into a pile where nothing is done. Think about that when you lend money via Prosper.

The execution is lacking. Caveat Emptor.

PS: As always, great discussion among Prosper.com lenders is found at prospers.org .

Prosper.com - 08/01/09 late loan stats update

2009-08-02T22:50:00.000-07:00

Here's the August 2009 update to to my Prosper.com late loan statistics charts.

Loans created in the worst month so far, October '06, have now gone past 43% bad!

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

On 01/15/2008, Prosper.com sent an email message to many lenders, explaining that 68 very late loans were being moved to a new category, a "legal test". In this test, Prosper would try taking legal action against very late borrowers, instead of just doing nothing. I thought at the time that it was a good move. Prosper had done such a horrible job of collecting on late loans, lenders were desperate for improvement, and the promise of legal action against some of the professional deadbeats who had ripped us off just sounded right to us. Many of us opted in.

Prosper's 01/15/2008 email promised ...

Since this is a test, we have not yet designed the system to track these revenues within the normal statement process. As such, the loans will be defaulted at zero value and the accounting provided on a monthly basis in a supplementary statement.

However, Prosper has never bothered to send lenders any of these promised supplemental statements! $735,000 of loans have simply disappeared from lender's view.

That's right. No monthly acccounting statements as promised. No reporting. Prosper has kept lenders completely in the dark on the status of the legal action on these loans. None of these accounting statements were ever produced during any of the 12 months of 2008, nor the 8 months so far of 2009!

I have written to Prosper about this a few times now. My most recent correspondence was in early July 2009. Their response was that there would be some status real soon now. No word, however, on the missing 20 months of statements or when or if they intended to ever produce any.

Fact is, even tho Prosper is keeping the details secret, with great effort lenders can track the status of some of these lawsuits. This happens because many courts make some lawsuit status details public via their web sites. (Not all courts make status available online, so we can't see the status of all of them, without traveling around to the various county courts, and checking the records manually.)

From the lawsuits that are visible on the web, it appears that Prosper has lost most of the cases. No one from Prosper has ever offered an explanation for this. Isn't that outrageous? I think it is. I think it shows a disdain for lenders. It shows that Prosper management believes it is not necessary to do the things that they say they will do. They believe this even when $735,000 of lender's money is at stake.

I seems that the legal test was horribly underfunded by Prosper, and at some point they just aborted. A damn weak effort. Instead of a symbol of Prosper's strength and a deterrent to deadbeat borrowers, it is just another sad joke in the Prosper.com story.

So what does that tell us?

PS: The best discussion among P2P and Prosper.com lenders are found on prospers.org. See you there!

Prosper.com - 06/01/09 late loan stats update

2009-06-05T00:59:00.000-07:00

Here's the June 2009 update to to my Prosper.com late loan statistics charts. Prosper remains closed for (legal) repairs, but we can (and do) still track the performance of the 28,939 loans they made before the hiatus.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

Many of the earlier posts in this blog are still on point, and provide background on prosper, from a lender's perspective. If you're new to this, please read old posts before sending questions. Thanks.

On June 1st, Prosper.com made their fifth try at submitting an acceptable registration statement to the SEC that will enable Prosper to reopen. Good luck Prosper. This is a huge document, and I've just about given up on following the changes. With each version it appears that they're becoming more like Lendingclub. Other opinions welcome.

Great discussions among P2P and Prosper.com lenders are found on prospers.org.

Lendingclub - 05/2009 late loan stats update

2009-05-23T17:52:00.000-07:00

These charts show statistics for the performance of all Lendingclub.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Lendingclub's performance web page.

The curves are "noisy" (ie they jump up and down a lot) and are not as orderly as the curves on the prosper chart. That's because the volume of loans at Lendingclub is still too low to get really good stats.

Lets slide these curves over to a common origin, so we can visualize how common their shapes are...

Just look at where these curves crossed the 390 day line, (ie 30 days after the 360 day line, because it takes 30 days for a loan to become 1 month late) or visualize where they might cross the 390 day line as they extend, and that tells you what fraction of loans went bad in the first year. This is then an estimate of the annual default rate for Lendingclub loans.

Yipes! What you see is that these various cohorts are defaulting at rates between 9%/year and 17%/year. Conclusion: These are pretty junky loans. It seems unlikely that lenders will do well when such a large fraction of borrowers are not repaying lendingclub loans.

The best discussion among P2P lenders occurs at www.prospers.org. See you there!

Prosper.com - 05/01/09 late loan stats update

2009-05-02T13:53:00.000-07:00

Here's the May 1, 2009 update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

For the "big picture" you can just look at that last chart. From the point of view of these performance statistics, Prosper.com loans run about 1150 days. (1 month before the first payment is due, 36 months during which payments are due, and another month before that last payment is declared 1 month late) The numbers aren't final for another 2 months, because it is possible for loans to recover during the next three months before the loan is charged off at the 4 month late point. Therefore about 1250 days is the final point. Look at the curves, and extend them to where you believe they will be at 1250 days.

Looking at the first year of Prosper.com loans, it is pretty clear that they're headed toward something like 42% bad. Loans that originated later (the shorter curves) are doing a bit better. They might end up around 35% bad. Big picture: On the average, these are junk loans. Caveat emptor. Any investor who doesn't realize this will do very poorly loaning money to folks who about 40% of the time don't pay you back!

This month, after a several month hiatus, Prosper has done more "unoriginations". For those of you who haven't followed these statistics for a long time, this requires some explanation. On the Prosper performance web page, they show a number labelled "loans originated". One might assume that this is the number of loans that were originated. It is not. This number goes down over time. Loans are from time to time removed from the set of loans described by these statistics. I track this, and count loans that are removed as having gone bad. (The name "unoriginated" comes from a word I learned in the third grade. In the old Sovient Union, people who were an embarassement to the government became "unpeople". Record of their existance was simply removed.) It is important to understand that these unoriginated loans are not loans that paid off, or are late, or have been charged off. Those categories are explicitly shown. The unoriginated loans are never explicitly shown. They just disappear.

The numbers I chart above are ratios. The numerator is the number of loans that have gone bad, and the denominator is the number of loans originally created (originated). Although Prosper reduces the number "originated" in their display over time, I keep the number constant, the original number of loans made. A ratio with a constant denominator is easy to understand as it evolves over time.

Lets look at an example. Consider the loans Prosper originated in October 2006. Initially there were 743 loans in this cohort. That's the number I use as a denominator. Starting in April '07, Prosper showed that there were only 742 loans originated in Oct '06. History changed. Starting in August '07, Prosper showed that only 740 loans had originated in Oct '06. Starting in March '08, Prosper showed only 736 loans originated in Oct '06. History keeps changing. In July '08, Prosper changed the number back to 740. Some unoriginated loans suddenly un-unoriginated themselves. I couldn't make this stuff up. In May '09 Prosper changed the number to 738. Here and there a few loans seem to come and go from the database. Nevertheless, I hold the denominator constant at 743, the number of loans actually created in October 2006. The latest statistic for Oct'06 is then calculated like this: The numberator is 16 loans in the 1-3 month late category + 281 loans charged off + 5 loans unoriginated = 302 bad loans. The denominator is (of course) 743 total loans. Finally 302/743 = 40.65% of the Oct'06 loans have gone bad so far.

Oct'06 is not the only month to have recent unoriginations.

Nov'06 originally 701 loans, in Apr'09 they showed 698, in May'09 they show 697.
Dec'06 originally 969 loans, in Apr'09 they showed 965, in May'09 they show 964.
Mar'07 originally 1161 loans, in Apr'09 they showed 1160, in May'09 they show 1159.
Apr'07 originally 1101 loans, in Apr'09 they showed 1098, in May'09 they show 1097.
Jun'07 originally 951 loans, in Apr'09 they showed 950, in May'09 they show 947.
Jul'07 originally 935 loans, in Apr'09 they showed 934, in May'09 they show 932.
Sep'07 originally 758 loans, in Apr'09 they showed 758, in May'09 they show 757.
Oct'07 originally 928 loans, in Apr'09 they showed 928, in May'09 they show 927.

I could go on, but I'm sure you get the idea. What causes these loans to be removed from the data? In the early days of Prosper, there were some cases where the loan origination numbers went down like this, and we were told that it was due to loans where identity fraud had been discovered. Prosper decided to treat those loans as if they never existed. There was some merit to their position, because at that time Prosper repaid the lenders (investors, note purchasers) in full for these loans. However, in later years, although I have been in discussion with a large number of lenders, I have never heard of Prosper repaying a lender in full for any loan. Therefore, I doubt that admitted identity theft is the reason now. (Prosper employees, feel free to add a comment to this blog explaining where these loans have gone.) Whatever the reason, this is a detail that adds complexity to the task of understanding loan performance. I wish they wouldn't rewrite history.

A few days ago Prosper ended their self-imposed quiet period, and has started originating loans again. They've changed the credit score limits, and a few other things that seem likely to change the statistics a bit, but it doesn't look like they've done anything to fix the structural problems which I have often discussed. Therefore I expect that as in the past, a large fraction of the loans will go bad.

The best discussion among P2P and Prosper.com lenders always found on prospers.org.

Prosper.com 03/01/09 - late loan stats update

2009-03-05T22:28:00.000-08:00

Here's the March 1, 2009 update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

A milestone was reached this month when one cohort, the loans prosper.com issued in October '06, have hit 40% bad (ie 1 month late or worse). Well actually only 39.97%, but that rounds to 40%.

Oh my god. How can anyone make money off loans that go bad at this rate? Prosper never implemented proper fraud control, collections, legal practices, etc required to operate a successful lending business. How could that have happened?

I now believe my trust in Prosper.com's founder Chris Larsen was misplaced. I based that trust on the fact that he had created the successful (I thought) loan company E-loan. Now I realize that E-loan wasn't really a loan company at all. It was yet another marketing front, part of the giant machine that gathered up borrowers and stuffed them into securitized loan packages, to be owned by someone else. Somebody else's problem. Who cares if they pay the money back. E-loan was part of the problem that drove our economy to disaster.

After buying E-loan from Larsen, Banco Popular gave up and shut it down. It is now just another chapter in the history of the mortgage fiasco.

The best discussion among P2P and Prosper.com lenders always found on prospers.org.

Prosper.com - SEC Offer of Settlement

2009-02-17T18:52:00.000-08:00

Back on 11/24/08 the Securities and Exchange Commission issued a Cease & Desist order which told us that Prosper.com had violated the securities act. That SEC order mentioned that the SEC had accepted Prosper's "offer of settlement", but the offer was not made pubic at that time. Prosper's offer has now been released by the SEC, and we bring it to you here and now.

I've transcribed Prosper's offer letter below, and provided a link to a scanned version. The transcribed text differs in formatting, but is identical in word.

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

ADMINISTRATIVE PROCEEDING
File No.
In the Matter of
Prosper Marketplace, Inc.
Respondent.

OFFER OF SETTLEMENT
OF PROSPER MARKETPLACE, INC.

I. Prosper Marketplace, Inc. ("Prosper" or "Respondent"), pursuant to Rule 240(a) of the Rules of Practice of the Securities and Exchange Commission ("Commission") [17 C.F.R. § 201.240(a)], submits this Offer of Settlement ("Offer") in anticipation of cease-and-desist proceedings to be instituted against it by the Commission, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act").

II. This Offer is submitted solely for the purpose of settling these proceedings, with the express understanding that it will not be used in any way in these or any other proceedings, unless the Offer is accepted by the Commission. If the Offer is not accepted by the Commission, the Offer is withdrawn without prejudice to the Respondent and shall not become a part of the record in these or any other proceedings, except for the waiver expressed in Section IV with respect to Rule 240(c)(5) of the Commission's Rules of Practice [17 C.F.R. § 201.240(c)(5)].

III. On the basis of the foregoing, the Respondent hereby:

A. Admits the jurisdiction of the Commission over it and over the matters set forth in the Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order ("Order").

B. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. § 201.100 et seq., and without admitting or denying the findings contained in that Order, except as to the Commission's jurisdiction over Prosper and the subject matter of these proceedings, which are admitted, Prosper consents to the entry of an Order by the Commission containing the following findings:

1. that Prosper violated Sections 5(a) and (c) of the Securities Act; and

2. ordering that, pursuant to Section 8A of the Securities Act, Prosper cease and desist from committing or causing any violations of, and committing or causing any future violations of, Sections 5(a) and (c) of the Securities Act.

IV. By submitting this Offer, Respondent hereby acknowledges its waiver of those rights specified in Rules 240(c)(4) and (5) [17 C.F.R. § 240(c)(4) and (5)] of the Commission's Rules of Practice. respondent also hereby waives service of the Order.

V. Respondent understands and agrees to comply with the Commission's policy "not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings" (17 C.F.R. § 202.5(e)). In compliance with this policy, Respondent agrees: (i) not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any finding in the Order or creating the impression that the Order is without factual basis; and (ii) that upon the filing of this Offer of Settlement, Respondent hereby withdraws any papers previously filed in this proceeding to the extent that they deny, directly or indirectly, any finding in the Order. If Respondent breaches this agreement, the Division of Enforcement may petition the Commission to vacate the Order and restore this proceeding to its active docket. Nothing in this provision affects Respondent's: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation or other legal proceedings in which the Commission is not a party.

VI. Consistent with the provisions of 17 C.F.R. § 202.5(f), Respondent waives any claim of Double Jeopardy based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein.

VII. Respondent hereby waives any rights under the Equal Access to Justice Act, the Small Business Regulatory Enforcement Fairness Act of 1996, or any other provision of the law to seek from the United States, or any agency, or any official of the United States acting in his or her official capacity, directly or indirectly, reimbursement of attorney's fees or other fees, expenses, or costs expended by Respondent to defend against this action. For these purposes, Respondent agrees that Respondent is not the prevailing party in this action since the parties have reached a good faith settlement.

VIII. Prosper states that it has read and understands the foregoing Offer, that this Offer is made voluntarily, and that no promises, offers, threats, or inducements of any kind or nature whatsoever have been made by the Commission or any member, officer, employee, agent, or representative of the Commission in consideration of this Offer or otherwise to induce it to submit to this Offer.

10th day of November {2008}
Prosper Marketplace Inc
By: {signature}
Print Name: Christian A. Larsen
Title: CEO & Chairman

Here's a scanned version of Prosper's Offer of Settlement.

Doesn't make for very exciting reading, does it?

When I read the SEC Cease & Desist order, and saw that it said the SEC had accepted Prosper's offer of settlement, I wondered whether the offer (and therefore the acceptance by the SEC) had contained some elements not found in the SEC's public Cease & Desist order. For example I wondered whether Prosper had agreed to any specific actions that had not been made public. Turns out, there aren't any such agreements in the offer. Most of the words in the offer simply say that if the SEC agrees to end the matter by issuing the Cease & Desist, then Prosper won't argue about it. It looks to be all boilerplate. Its like something from a sci fi horror flick: Sign here so the shock treatments can begin. Then we can set you free.

Thank you to the SEC for releasing this document to the public.

For those of you who have read the above and are completely baffled, be advised that the SEC Cease & Desist order makes much better reading. It actually sets the stage by explaining the context of the SEC's action.

The best discussion among peer-to-peer lenders takes place at prospers.org
See you there!

Prosper.com - one of your loans was charged off

2009-02-10T22:58:00.000-08:00

It is so sad. Day after day, lenders see loan after loan go in the toilet. "Charged off" in prosper lingo. Here's my Prosper.com in-box...

I've written extensively about the lack of moxy in Prosper's collections department. (and that's the most polite way I can say it) In May 2007 I wrote an open letter to Prosper.com .

May 2007 - collections is broken

A year later I wrote another appeal to prosper to get their collections act together.

May 2008 - here's what you should do with the lawyers

They never listen.

They never respond, except to say "One of your loans was charged off".

PS: The best discussion among P2P lenders occurs on prospers.org

lendingclub - 02/01/09 late loan stats update

2009-02-05T19:00:00.000-08:00

These charts show statistics for the performance of all Lendingclub.com loans. (If you were looking for prosper.com stats, find them here.)

Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Lendingclub's performance web page.

The curves are "noisy" (ie they jump up and down a lot) and are not as orderly as the curves on the prosper chart. That's because the volume of loans at Lendingclub is still too low to get really good stats.

Something odd is happening in the last month. Looks like lendingclub must have goosed up their collections activity. Bravo!

Lets slide these curves over to a common origin, so we can visualize how common their shapes are...

Just look at where these curves crossed the 390 day line, (ie 30 days after the 360 day line, because it takes 30 days for a loan to become 1 month late) or visualize where they might cross the 390 day line as they extend, and that tells you what fraction of loans went bad in the first year. This is then an estimate of the annual default rate for Lendingclub loans.

The best discussion among P2P lenders occurs at www.prospers.org. See you there!

Prosper.com - 02/01/09 late loan stats update

2009-02-02T21:24:00.000-08:00

Here's the February 1, 2009 update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

I attempted to update my lendingclub late loan charts this month, but the stats page on the lendingclub web site is displaying bad data. They promise to fix it soon.

The best discussion among prosper.com lenders takes place on prospers.org.

Prosper.com - best architecture part two

2009-01-18T21:02:00.000-08:00

In the last episode, I told you about the building containing Prosper.com's offices. We will now give you the details.

"The only building in San Francisco with both Romanesque and French Chateau ornamentation." Yea yea. Lets go look up close.

I walk down the south side of Sutter Street, lookin' for Prosper headquarters, 111 Sutter, also known as the Hunter-Dulin building. Suddenly I'm confronted by a bare breasted woman giving me the finger.

Those of you familiar with San Francisco will know that this sort of thing is not particularly unusual. Those stories about San Fran are all true. But this woman isn't just stoned. She is cast in stone.

Can you imagine erecting an office building today festooned with scupture of naked women? In the 20's there was a different style.

Hey, this could be our building.

Here's an address. Yea. This is the place.

Dig those columns! Carved columns and naked ladies. That's what they mean by romanesque!

Let your eye follow those columns up, and you see (photo credit: Flickr/frankfarm)...

Those gargoyles looking down at you are alternating birds and lion heads. They don't make 'em like this any more.

Looking down again, we see the main entrance. That's a sculpture of Mercury in the middle. Outstanding!

Go thru those doors now, and step into the lobby.

Not like any office building I ever worked in. Look at that ceiling! Hand painted. That's just incredible.

Don't linger too long. There are some security folks behind you. They don't yet know we're up to no good. They seem like very nice people. Smile.

Now walk past 'em like you know where you're goin'. We gotta check the building directory.

Yea. There it is. Prosper, on the 22nd floor. Lift the collar of your trenchcoat. We're goin' stealthy. Quickly now, into the elevator. As we enter the elevator, look down.

That brass floor inlay has been there 82 years now. The guts of the elevator system was replaced during the 2002 remodel, but some parts of the original elevator cars remain. Those fuzzy words in the center say "The Hunter Dulin Building". Hunter, Dulin & Company was a west coast investment bank who had this building built. I've failed to trace their history past 1928, but it isn't too hard to imagine what happened to investment banks during the great depression that followed soon after the Hunter Dulin Building was finished.

Don't push the 22 just yet. We're gonna pay a short visit to the 5th floor..

111 Sutter was the (story) location of Sam Spade's office in The Maltese Falcon. As we exit the elevator, we find Spade (Humphrey Bogart) hard at work in conference with some dame. That's San Francisco's Bay Bridge in the window. The bridge is somewhat out of scale. Hollywood took dramatic license to make the bridge look like it is right next door. In the real world, its 1 mile away. Today the view is obscured by a giant skyscraper some fool built (in 1964) just to the East of 111 Sutter.

Sam Spade is not the only famous resident of 111 Sutter. In 1948 Jay Ward, who would later create Rocky & Bullwinkle, rented an office at 111 Sutter, where he created, and sold to NBC-TV, a character known as Crusader Rabbit.

I haven't found any physical evidence of Ward's time here anywhere in the building. Seems a shame. Rocky and Bullwinkle are important cultural icons, but they're enshrined in Los Angeles, so lets move on. Back on the elevator. Next stop, 22nd floor.

Did I mention that the elevator is haunted?

Oh, and I've managed to obtain a floor plan of the 22nd floor. Should help us navigate the Prosper offices.

Darn. Right floor, but the plan seems to be from a prior occupant.

The 22nd floor of 111 Sutter was the West Coast headquarters for NBC from 1927 thru 1943. NBC occupied the entire 22nd floor, just as Prosper does now. They had studios, offices, the electronics that amplified the audio and piped it all over the west coast thru phone wires. This was the place that the famous NBC chime sound originated. Note the "pipe organ loft". Not every office building has one of those.

In 1927, electronics was a little bigger than today. Even tho there was no radio transmitter at this site, the generator controls, DC power supplies, and audio amplifiers looked pretty impressive. This is the master control room at the upper right of the floor plan.

Generator controls in the back. DC power supply controls on your right. Audio equipment on your left. Prosper employees today occupy this very same space.

They must have had a great view of the Bay Bridge construction from here. The Bay Bridge was built between 1933 and 1936.

Here's studio A, with the 1941 NBC staff assembled for a group photo. Note that there's a mezzanine above the 22nd floor. I don't know what has become of that space. Catch the fancy inlaid wood balcony!

There's a lot more, but our elevator has arrived, and we step into the present-day 22nd floor elevator lobby.

Its kind of a letdown, isn't it? We can peer thru that little glass window in the door and see the reception lobby of Prosper.com

Doesn't seem to be anyone here to greet us. Hanging above you see a banner from the first ProsperDays convention in 2007 with signatures of attendees. Maybe they just don't notice us. Lets continue our stealth. Open the door and walk on in. Ah, the people are thru that door on the right.

Still nobody notices us. Its just as well. We sneak up behind this CBS news guy while Chris Larsen (CEO of Prosper.com) gives an interview. Notice that the environment is far less exotic here than the lobby. The exterior and the lobby are from a different world. In here its regular ol' office space, and it seems that Prosper has been pretty frugal with the furnishings. (No oil paintings on the walls, no books in the single bookcase.) Over the years this space has been remodeled many times. I can't help wishing that they could have at least left the balcony and the pipe organ.

Around the corner we can sneak into Prosper's executive offices. Ought to be some good stuff here.

Goldmine! On the whiteboard you can see Prosper's plans for new features. One feature described here looks like it will save lenders the need to wait 3 years to find out if their borrowers are going to pay them back. After the lender wins a participating position in a loan, three windows appear on his screen. They whirr around, and then a picture of a different fruit is displayed in each window. Its implementation quite complex, but the design is right there on the board.

Its getting late in the day, and there's so much more I want to see. I looped around the floor several times, but haven't found any area labelled "collections department". I did want to talk with those folks. Maybe next time.

I do see what could be a door leading to a roof hatch. Unfortunately, this familiar lookin' guy is hangin' around the area, and we have to wait awhile for him to leave. Wouldn't want to give ourselves away.

Finally he leaves, and we go thru the door and climb out onto the roof. It is amazing that we got this far. The security guard is strangely absent during our visit.

That amazing thing in the center is one of the 20 copper spires that adorn the roof of 111 Sutter. They were part of the original design, and can be seen in photographs taken in the 30's, but sometime during the 50's they disappeared. During renovation in 2001, the original plans for the spires were found in the basement, and they were recreated and installed. These contraptions and the leftover wiring from NBC's studios create the ectoplasmic resonance that will bring back Gozer the Destroyer. Just you wait and see.

One more picture. Don't look while I climb out to get this, and whatever you do, don't look down.

There's a lot more material on the Hunter Dulin building available on the web. Google is your friend.

By the way, I just noticed that on 01/16/2009 Prosper filed another amended S1 with the Securities and Exchange Commission. This is the first amendment of the complete rewrite. That probably means approval is close at hand. Folks don't usually file amendments unless they are responsive to SEC comments, and thus likely to result in approval.

PS: For photo credits, click on the photos. Some photographs may not depict current events. Nothing in this article is intended as an offer to buy or sell securities. Your investments may lose value. This blog is not FDIC insured. No animals were harmed during the writing of this blog. And finally, don't believe everything you read on the internet.

Prosper.com - the best architecture

2009-01-11T13:43:00.000-08:00

As prosper.com passes 90 days of "quiet period", I thought it was a good time to compare Prosper's innovative architecture with the competition. That's the famous Ghostbusters building on the left, where Sigourney Weaver helped Gozer the Destroyer visit Earth. The building on the right contains Prosper.com headquarters, where... Lets just say I'm developing a theory.

Thus begins the study of comparative modern gothic horrors.

These buildings look a lot alike, at least from a distance. Similar construction, color, height, age. Each is square until about floor 15 where some sort of Art Deco thing begins to happen. The architectural detail, however, is entirely different.

The ghostbusters building, 55 Central Park West, New York, was built in 1929. It is famous, thanks to the movie and the famous real people who live there. But it is ugly and flat when viewed close up. At street level it looks like an old warehouse. Looking up you see what appear to be air conditioners hanging out of windows. New Yorker's pardon me... Its a dump.

The Hunter-Dulin building, 111 Sutter St, San Francisco, was built in 1927. It is a gothic palace with beautiful and amazing architectural detail. The books all say "It is San Francisco's only building with Romanesque and French Chateau ornamentation." I didn't know what that meant either, but I do now, and I'm gonna show you.

Oh, and it is home to Prosper.com . And Prosper's not just on just any floor. They're on the top floor. The famous top floor. Just below 20 gothic spires tuned to the fifth resonance of the ectoplasmic membrane. (You can see two of 'em in the picture above.) But I digress.

In a future installment, we'll go inside 111 Sutter for a behind-the-scenes tour. You'll meet some of the inhabitants, learn what really goes on there, and why Gozer picked the wrong building.

I'm gonna take you right up to the top floor where Prosper.com lives. We might even venture onto the roof, if the guard's not lookin'. Stay tuned .

PS: For photo credits, click on the photos.

Prosper.com - 01/01/09 late loan stats update

2009-01-02T14:45:00.000-08:00

Here's the January 1, 2009 update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

While the press bemoans the credit crisis, there is no such event visible in this data. There's simply nothing special about the last few months. Prosper.com loans continue to go bad at about the same rate as in earlier months. "Credit crisis" is no excuse. These loans simply form a very low quality portfolio, going bad at around 20% per year.

Loans originated after late 2007 look a little better, because Prosper raised the credit score cutoff, chopping off the worst borrowers, and thereby raising the average quality of the portfolio.

Meanwhile, there has been no improvement Prosper.com's collections activities. This appears to be a competely dead area, with no effort being expended on lender's behalf. In fact, Prosper has removed the collection statistics of their main collection agency Amsher from the Prosper web site. Lenders can no longer directly observe how bad collections are.

I'm sorry to notice that Prosper has removed the ROI calculation from their performance stats web page. Unfortunate, because it was the best ROI calculation around for these loans. It actually used the cash flows, instead of doing a hack calculation using "average loan age" as the 3rd party web sites do. My guess is that Prosper's damn lawyers once again advised them to provide even less service to their customer base (of lenders). Its a shame.

The best discussion among prosper.com lenders takes place on prospers.org.

Prosper.com - new prospectus good, but...

2008-12-07T14:46:00.000-08:00

The new prospectus that prosper.com filed with the SEC recently (12/5/08) will be approved. It is well written and covers all the bases. The only thing that will hold it up is the ordinary inclination of any regulator to look very very carefully at anything that follows a legal brouhaha.

As I predicted, they dumped the lawyers who wrote the first prospectus a year ago. The new prospectus is authored by a completely new legal team.

As I predicted, they've adoped a business model where the instruments sold to investors are obligations of prosper itself, ie derivatives whose payments are based on the payments (or lack thereof) on the underlying consumer loan. In other words, they copied Lendingclub.

The new prospectus is very thorough. Because the new instruments will be obligations of Prosper, all Prosper's financial detail is in the prospectus. Exactly the same stuff you'd see in a prospectus for a company that was issuing an IPO of common stock. How much cash they have, how fast they're burnin' it, salaries... a voyeur's paradise.

By the way, the filing is actually 6 documents. Serious investors should try to read at least the first two of these. Won't be easy. Nearly 4 megabytes of text here.

I know you're probably thinkin' hey some of that stuff used to just be on the web site. Now its part of a prospectus? Exactly. We're moving into the regulated world. Prosper's statements about these investments are now cast in concrete (in the SEC's vault), instead of appearing only in fluid web documents changable at a whim, tracked only by a few lenders who frantically archived copies as unannounced changes whizzed by. Sometimes regulation is a good thing.

While this new prospectus probably satisfies all the SEC issues, it does damn little for lenders. The fundamental problems remain. I'll give you a few examples.

We all know that Prosper's lame efforts at collections are a very serious problem. I described it as a symptom of the more general "principal/agent" problem in my ancient open letter to prosper. Have they made any effort to do something about this? No. In fact, they have instead institutionalized the idea that doing almost nothing is ok, by explicitly saying in the S1 that they will do almost nothing!

We are obligated to use commercially reasonable efforts to service and collect the borrower loans, in good faith, accurately and in accordance with industry standards customary for servicing loans such as the borrower loans.

"We are obligated" .. I like that start. But what are those "commercially reasonable efforts" exactly? Don't have to wonder long. They define it pronto.

If we refer a delinquent borrower loan to a collection agency on or after the 31st day of its delinquency, that referral shall be deemed to constitute commercially reasonable servicing and collection efforts.

Whoa! Just the act of sending the loan to a collection agency satisfies their entire obligation with regard to collections! How conveeeenient. (Quarterbacks around the world rejoice! You can now just throw, without worrying about whether anyone receives!) Prosper explicitly takes no responsibility for selecting, checking up on, managing the collection agency, helping them, providing them with good information, or otherwise ensuring that anything at all is actually done. I imagine this cross-examination at some time in the future:

Lawyer: So after sending the package of loans, to the collection agency, you didn't check up to see if it had been received?

Prosper guy: Nope.

Lawyer: You didn't check to see whether the collection agency was working on them?

Prosper guy: Nope.

Lawyer: You didn't know that AmSher had ceased collection operations and become a beauty salon?

Prosper guy: Nope.

Lawyer: And were your actions in this matter reasonable?

Prosper guy: "Hey, we referred that loan to a collection agency. If they didn't do anything, like they didn't call the borrower or anything, hey that's not our fault. We satisfied our obligation as specified in the prospectus."

That's really weak.

Prosper is continuing their longstanding policy of shirking responsibility for the management and servicing of these loans. In one way, the new scheme is worse for lenders. Under the old prosper scheme, lenders owned the loans, so we could argue that prosper, our servicing agent, had a responsibility to us to service those loans competently. Under the new scheme, prosper owns the loans. Its more indirect. Lender's rights are more tenuous. It will be more difficult for lenders to force prosper to act appropriately.

But wait, there's more. Lenders have been concerned about the quality of Prosper's checks of borrower's identity and income since the beginning. In the prospectus, for the first time, prosper gives us some numbers:

For example between September 1, 2007 and August 31, 2008, we verified employment and income for only approximately 22.6% of borrowers. When we perform these verifications, we contact borrowers by email or telephone to request additional information.

If the borrowers fail to provide satisfactory information in response to an income or employment verification inquiry, we may request additional information from the borrowers or cancel the borrower’s listing or refuse to proceed with the funding of the borrower loan.

Of the borrowers undergoing income verification for the period from September 1, 2007 to August 31, 2008:
approximately 56.7% provided us with satisfactory responses and received a borrower loan;
approximately 37.7% did not provide satisfactory responses, or did not respond, and their listings were canceled; and
approximately 5.9% either withdrew their listings, or failed to receive bids totaling the amount of their requested loan.

Oh my. Depending on how you count that last category, something between 1/3 and 1/2 of borrowers failed income and employment verification! That's an awfully high proportion of liars. Of course this is only within the sample of 22.6% of borrowers who Prosper challenged.

We don't know what the results would have been if Prosper had verified income and employment on the remaining 77.4% of borrowers, but the numbers above give us reason to be concerned.

I tried to write an explanation of how to think about these numbers, but I decided that I had used too many words. Prosper member DakotahFury said it well in a recent discussion:

Holy crap...that is an astonishing, shocking, and infuriating figure.
If you were a factory manager, and 45% of the products you QC'd were faulty... how could you justify NOT checking every single product that went out the door? Heck, how could you justify not shutting down the line and looking for ways to structurally change the way you were going about business?

Indeed. It only takes a small percentage of bad loans to sour the mix.

There are lots more tidbits in there for careful readers. I want to hit just one more.

In the prospectus prosper discusses the legal black cloud (contingent liability they call it) associated with the sale of loans while Prosper was operating without SEC registration. There have been many forum discussions in which prosper members speculate that this could mean the end of Prosper. The liability after all seems huge. I don't think so.

Prosper issued $178M of loans prior to registration. Of these there have been $22.3M net chargeoffs. You can imagine some sort of worst case where class action suits might force Prosper to pay back lenders for all the loans that went bad. That $22.3M looks big relative to the approximately $10M Prosper has in the bank. This is too simple a model.

First, $22.3M isn't a worst case at all. If you look at my late loan curves, you can see that Prosper loans are headed toward about 40% of the loans eventually going bad. 40% of $178M is $71M. A super horrible number.

But then there's a one year statute of limitations. The first class action suit was filed 11/26, and if we look at loans originated in the one year prior to that, we find $77.3M of loans. If my prediction is right, about 40% of those may go bad. 40% of $77.3M is $31M. Well that's sounding less bad. There are situations where lawyers could argue that the statute of limitations should not apply, and these issues are complex and beyond my understanding, so who knows if the lawyers can limit the damage in this way.

But lets use that $31M number. It looks large relative to Prosper's cash in the bank, but that's not the right comparison.

Even if Prosper didn't have this risk, they'd need to raise money before the end of 2009. That's easily calculated from numbers in the prospectus. You might think it would be hard to raise money in their present pickle, and indeed be difficult to raise money for a business that is shut down, but Prosper isn't gonna stay shut down.

I predict that the prospectus will be approved, perhaps with minor modifications, and Prosper will be back running within a few months.

Because Prosper will need cash before the end of 2009 they will do another funding round with VCs. The VCs will invest, because they still believe in the concept. Most opportunities they see haven't built a membership of 800,000 people! It is likely that this will be a "down round", where VCs get shares at a price lower than their last investment, thus substantially diluting the founders. Lets say Prosper gets another $20M. (It might be structured to come in in small chunks, or some other magic which prevents Prosper from looking juicy to the plaintiff's lawyer.)

The class action suit will drag on for at least 2 years, unless Prosper takes initiative to settle it sooner.

In the meantime, Prosper will grow its business, and get itself on the road toward an IPO.

Getting ready for an IPO is hard work involving a lot of accountants and lawyers, but in Prosper's strange case, the accounting and legal work is already done. It had to be done to write the prospectus for "borrower payment dependant notes" that they have just filed. You could cut and paste from that baby, and do an IPO any time you like. ...except for the fact that a shut-down business is not the best candidate, and the fact that the stock market isn't in the mood.

One to two years from now all that will have changed.

If the class action suit proceeds, it will settle for 20% of the $31M of bad loans that get in under the statute of limitations wire, ie $6M. The money will likely come from VCs. (It is also possible that the IPO money could be used to pay the damages, but this is risky, because sight of IPO money would make the plaintiff's lawyer salivate.)

The stock market will recover. Prosper will do an IPO.

I should also mention that there will be a 34% chance of rain tomorrow, diminishing into the evening, with a slight chance of thunderstorms during the early morning hours.

Might be fun to sit in the board meetings, just to hear what the VCs think about all of this .

Prosper.com - 12/01/08 late loan stats update

2008-12-02T03:07:00.000-08:00

Here's the December 1, 2008 update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

Click on the chart to see a larger clearer version.

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

The best discussion among prosper.com lenders is found at http://www.prospers.org/

Prosper.com - More legal trouble

2008-12-01T19:00:00.000-08:00

Many legal developments for prosper.com in the last 48 hours. New lawsuits. New settlements. All are being reported elsewhere. I'll summarize the major links here for completeness.

An association of state securities regulators called NASAA has piled on, and Prosper has settled with them for $1M: NASAA Settlement (Although the name is similar, I don't think these are the same guys who do the space shuttle.)

A new class action suit has been filed against Prosper.com. The complaint has now become public: Prosper Class Action Complaint

A new blog has appeared, which seems intended to keep us up-to-date on that class action suit: Prosper Class Action Blog

A dumbfounded lawyer blogs about Prosper.com: What were they thinking?

With the legal front so well covered, I can now move on to more interesting subjects !

Prosper.com - SEC Cease & Desist Order

2008-11-25T10:56:00.000-08:00

Well... As I predicted in my last writeup, the SEC has found Prosper.com to be in violation of the securities act of 1933. The SEC made this finding public yesterday.

The SEC's public statement can be found here:
SEC Prosper Cease & Desist Order

This SEC release explains why prosper.com has ceased operation.

From the SEC Order. . .
The loan notes issued by Prosper pursuant to this platform are securities and Prosper, from approximately January 2006 through October 14, 2008, violated Sections 5(a) and (c) of the Securities Act, which prohibit the offer or sale of securities without an effective registration statement or a valid exemption from registration.

The details are a fun read, and cover much of the territory that has been discussed here in the past.

Prosper.com - quiet period my ass

2008-11-19T11:53:00.001-08:00

It has now been more than one year since Prosper.com's ill-fated SEC filing which attempted to create a secondary market, and apparently failed. In the meantime, Lendingclub filed, got approval, and began operating such a market. Prosper at the very least has lost its first mover advantage.

What happened? And what the hell is this thing they're calling a "quiet period"?

On 10/30/2007, a little more than a year ago, Prosper.com filed a prospectus with the SEC to allow them to sell "notes" from one lender to another. This is what Prosper calls the "resale market". I remember reading the prospectus at the time and thinking how strange it was. If these things are securities, requiring SEC registration when they're traded from one lender to another, then why aren't they securities requiring SEC registration when they're sold to the first lender? And if they are (illegal) unregistered securities when sold to the first lender, then Prosper.com has been selling illegal unregistered securities to thousands of lenders for two years. It seems likely that the SEC had similar concerns, because the prospectus was never approved. It could not possibly be approved now, because there have been material changes since it was written (Co-founder John Witchel left Prosper for example). Prosper's year-old filing therefore is dead. Can't be approved as is. They would need to file again.

For background on selling unregistered securities...
http://invest-faq.com/cbc/warn-unreg-secur.html

In the time since Prosper filed, Lendingclub came along and did the same thing. Lendingclub filed with the SEC on 06/20/08, and was approved on 10/14/08, just 116 days later.

So what's the hangup with Prosper.com?

If you read the prospectuses filed by Prosper.com and Lendingclub, you will see that they are quite different. Lendingclub admitted up front that the thing they are selling lenders is a derivative. It is an obligation of Lendingclub, which pays amounts that depend on what borrowers pay to Lendingclub. This is a pretty standard sort of thing, which the SEC has approved many times. Lendingclub structured the thing so that the SEC could easily recognize this as a kind of thing it had approved before. There existed a precedent.

From the LendingClub prospectus: "The Notes will be unsecured special, limited obligations of Lending Club."

From the Prosper.com prospectus: "The Notes represent unsecured fully-amortizing credit obligations of individual Borrowers on the Platform." and later "All Notes issued on the Platform are unsecured credit obligations of individual Borrowers."

So while Lendingclub admitted to creating derivatives, Prosper tried to step to the side and argue that the securities they were registering were actually the obligations of somebody else. This has no precedent. This is unlikely to be approved by the SEC. That I believe is one fundamental problem.

But there's another problem. If the SEC read the prospectus the way I did, they would have the same question I had about the elephant in the room. If these things Prosper sells require registration, then perhaps they require registration the first time they are sold, not just upon resale.

If the SEC believes that then Prosper is in a pickle. The securities act of 1933 considers the sale of unregistered securities a felony subject to punishment by a 5 year prison term. Its pretty much the SEC who decides what is an unregistered security. It is this consideration that gives the SEC much of its authority!

So now lets go back to the question of Prosper's "quiet period", and what the heck it means. They've called it a quiet period, but that's not what it is.

The term "quiet period" refers to a period of time around the issuance of a new stock when the issuing company is supposed to take careful precautions to avoid any appearance that they are hyping the new issue. This generally means they shouldn't give interviews hyping how great the company is, for example. It just means be quiet. It does not imply that the company should cease operation. Companies do not stop selling shoes, or refrigerators, or whatever they normally sell, during a quiet period.

Prosper has not just gone "quiet". They've stopped issuing new loans. I believe they did this because they believe they are in substantial risk of being charged by the SEC with selling unregistered securities for the last two years. We always knew there was regulatory risk associated with this new kind of business model. Well here it is.

Getting out of this pickle will require either convincing the SEC that they should go back to sleep ... everything is ok, or else filing a new prospectus and getting it approved. Until one of those two things happens, Prosper would be operating at considerable risk if they continued to sell these allegedly unregistered securities. Therefore, they had to cease.

This isn't a 'quiet period'.

Its a 'Shut the doors, turn off the lights, hide in the back, and hope the policeman won't knock down the door period'.

No one knows how long this will take. Prosper hasn't even filed yet. Prosper needs to hire a new law firm (I wish whoever wrote that last prospectus should go work for my competitor.), then write a shiny new prospectus, file it, and get it approved.

In the one month that has passed since the shutdown, I would guess that they have hired the new firm. They obviously haven't filed a new prospectus. That puts them somewhere between step 1 and 2.

When that prospectus is eventually filed, I'm betting it will say, (much like the Lendingclub prospectus does), that the notes investors purchase are obligations of Prosper.com, not obligations of the borrowers. This changes the risk profile for investors (who prosper calls lenders). When considering the purchase of an obligation of Prosper.com, we need to know something about the financial situation of Prosper.com. We need to see a balance sheet! We need to know what other obligations may be senior to ours. Will Prosper understand this and step up and do what's right in the new environment? I don't know. If I were to judge from their past "To heck with the lender" management perspective, I'd have to say no.

Derivatives such as I describe here are commonplace. Awhile back I invested in a NYSE traded floating-rate note of Daimler-Chrysler. Symbol JZD. (You can read about it at http://www.quantumonline.com/search.cfm?tickersymbol=JZD*&sopt=symbol )

Looked great, but it kept going down. Finally I realized that this is actually a derivative. It was an obligation of Lehman, who would pass thru the payments made by Daimler Chrysler, just as Lendingclub or Prosper will pass thru the payments made by borrowers. As Lehman's financial situation became less clear, these derivatives sold off. You've gotta understand the financial condition of the middleman! I was a bit naive. Now I am a bit smarter.

There could be other significant changes in the way the whole thing works too. Prosper has lost its mojo. Although they were first, they no longer act like a frontrunner.

When Lendingclub opened up with a blog full of personal finance drivel, Prosper immediately added a to their site blog full of personal finance drivel. It is as if someone at Prosper said "Oh, of course, Web 2.0, you gotta have a blog! What were we thinking?" Most recently the Prosper blog tells consumers that they should go out and borrow more, at a time when the whole world is deleveraging from the excess borrowing of the last decade. Drivel. Hey Prosper, you were a leader. You don't need to be a copycat. Personal finance drivel advice is not the answer.

I hope they don't continue with this me-to approach. For exampe, I hope they don't adopt Lendingclub's non-auction approach for setting interest rates. I think that's a disaster.

Here's some evidence that Prosper may be thinking about major changes in the platform before they reopen: Several months ago, software development slowed to a trickle.

I've written before about how back in January we were promised monthly statements on the legal-test loans. (Loans where prosper has filed suits against badly delinquent borrowers.) Its November, and no monthly statements have been produced. A lot of months have gone by.

I've written many times about the statistics on collections of late loans. I never could understand how the numbers were so bad. I've written several times about the fact that some of the numbers jumped around faster than was possible, indicating bogosity. Something was wrong, and Prosper kept ignoring it. In August, prosper admitted that the stats they'd been giving us for collection performance at Amsher were wrong, due to a bug in the software interface with Amsher. I figured they'd fix it. Instead, they simply removed the Amsher stats from their web site. August, September, October, November. Nobody fixes the bug. Nobody cares? Lenders figure this is just another sign that Prosper thinks lenders are crap, and don't deserve the data.

How can a company be run this way? It could be rationally run this way if they figured that much of the existing platform was gonna be thrown away soon.

That's just a theory of course.

I'm sure it will all be revealed at ProsperDays 2009! See 'ya there.

Lendingclub - Late Loan Stats

2008-11-12T20:50:00.000-08:00

Lendingclub has been around for more than a year now, so I figured maybe there was finally enough data to allow one to understand the default rate behavior of Lendingclub loans. I have prepared charts of the behavior of Lendingclub loans that are similar to the ones I've been making for Prosper.

These charts show statistics for the performance of all Lendingclub.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Lendingclub's performance web page.

The curves are "noisy" (ie they jump up and down a lot) and are not as orderly as the curves on the prosper chart. That's because the volume of loans at Lendingclub is still too low to get good stats. We can see that Oct'07 was a really horrible month. Those loans are now 1 year old, and 15% of them have gone bad! That's about as bad as prosper!

After Oct'07 they must have fixed something, because the later curves all seem to have a lower slope. We'll never know. Lets slide these curves over to a common origin, so we can visualize how common their shapes are...

Just look at where these curves crossed the 390 day line, (ie 30 days after the 360 day line, because it takes 30 days for a loan to become 1 month late) or visualize where they might cross the 390 day line as they extend, and that tells you what fraction of loans went bad in the first year. This is then an estimate of the annual default rate for Lendingclub loans.

There is a little problem. Although the data is still quite noisy becase there aren't enough loans, we can see that various groups of loans fall between 5% and 15% bad after 1 year.

Lendingclub has given us estimates of the annual default rate for their loans. This used to be on the web site, but is now found in the prospectus. For their best grade, "A1" they predict a 0.16%/year default rate. (Yes, that's really zero point one six percent!) For their worst grade, "G5" they predict a 5.25%/year default rate.

Ideally we would gather statistics for each credit grade and compare them to these default rates that Lengingclub assumed. Unfortunately, if we split the monthly pools of loans into all the different credit grades, there would be very few loans in each group, and the stats would be horribly noisy.

What we can do however is look at all the Lendingclub loans together. If Lendingclub's numbers were right, the default rate would be something between 0.16%/year and 5.25%/year, so it might come out something like say... 2.5%. However, looking at the picture, you can see they're way off. No month is anywhere near 2.5% at the 390 day line. The curves show us that the average might be more like 8%/year. Hard to be precise with such a small amount of data.

If Lendingclub has used faulty estimates of default rate, then the interest rates on Lendingclub loans are all too low. Seems likely.

In the beginning, Prosper.com gave their lenders default rate estimates that came from Experian (their data supplier), showing their experience with a large number of credit card accounts. Many lenders initially used those estimates to determine the rates they bid. Unfortunately, actual Prosper loans turned out to behave very differently than the Experian credit card statistics. Anonymous internet P2P loans apparently don't behave like historical credit card accounts. Sorry. Later, Prosper deleted the hilarously low Experian numbers from their web site, and showed lenders only their own historical performance data. This was a landmark improvement.

Likewise, Lendingclub obtained estimates from historical account data at Transunion (their credit data supplier) and naively used these to calculate the interest rates they offer on their loans. The assumptions aren't holding, so the rates are too low.

Luckily, Lendingclub added a term in the interest rate formula that they call "adjustment for risk and volatility". They set this term equal to 2x the expected default rate, and added it into the interest rate. (There's a good theoretical basis for doing something like this, which I won't bore you with.) The effect is that interest rates end up adjusted for 3x the assumed (bogus) default rate. That provides a little wiggle room, especially for the lower credit grades. For the high credit grades (ie A) however, I suspect they're just way off.

Lendingclub has originated between 100 and 400 loans in each of the months shown above. Unfortunately, the recent months have very low numbers of loans originated, because Lendingclub was not taking in lender money while they fought some regulatory battles. They're only now ramping back up. We really need them to get over 500 loans/month and then accumulate data for several months (a year?) before we can understand Lengingclub loan performance in a more seriously quantitative way.

Best discussion among P2P lenders occurs at www.prospers.org.

Prosper.com - 11/01/08 late loan stats update

2008-11-10T14:46:00.000-08:00

Here's the November 1, 2008 update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog, and in forum discussions on the old prosper forum, now archived at www.prosperreport.com

PS: Best discussion among Prosper.com lenders can be found at http://prospers.org/

Prosper.com - Google says Site Not Available

2008-11-08T23:55:00.001-08:00

This just struck me as funny. Every now and then Prosper takes their web site down to update software. During this time, they put up a "site not available" page.

For several weeks now I have noticed that google has been indexing this "site not available" page. If you did a google search for prosper, "site not available" would be one of the pages listed. That was funny. The google robot must have wandered thru a few times while the site not available page was up.

Yesterday Google decided that "Site Not Available" is the name of Prosper's main page! Oops.

I decided to capture this for posterity.

I checked again today and note that it is already back to normal. Google is quick. Could happen again any day tho.

Note to Prosper webmasters: Consider adding a META command with NAME="robots", CONTENT="noindex", to the site-not-available version of the main page.

Prosper.com - the lawsuits are not going well

2008-10-31T02:07:00.000-07:00

In January of this year, Prosper initiated a test program to bring suit against a small set of nonpaying borrowers. 66 very late loans were selected, and Prosper turned these loans over to the law firm of Hunt & Henriques to go after the nonpayers, and try to recover some funds.

Almost 10 months have passed, so it is reasonable to ask the status of the cases in this test program. Unfortunately and amazingly, Prosper does not report any of this status to the lenders whose money is invested in these loans. (They told us they would report to lenders monthly, but they have not.)

I wrote about this earlier here.

Lets review the timeline:

01/15/08 -- Prosper sent many lenders an email message asking them to "opt in" to this project to allow Prosper to sue borrowers on the lenders behalf. I opted in.

02/17/08 -- Prosper repurchased the loans from lenders, to simplify court proceedings. Prosper didn't pay anything to the folks who opted in. Payment will come later, depending on success in the lawsuits.

02/25/08 -- First suit filed. In Riverside county. Prosper vs Cline
04/08 -- Lots more suits filed.

So its now >6 months after the suits were filed. Its time to see what happened.

Although Prosper doesn't tell us anything about the status of these cases, we can look some of them up on the public web sites of various courts. All 66 cases were in California, and several large California counties have excellent web sites that provide status of civil cases. I've visited these court websites, and retrieved status of each case I can see. I've simplified the legal language. If you want to see the details you can visit the court web sites and retrieve the same information directly from the source.

Los Angeles Superior Court
Case Number: 08C00921
PROSPER MARKETPLACE, INC. VS. BROWN, HOLLY
Case filed 2/25/08.
Proof that summons was served on Holly Brown filed on 4/25/08.
Case dismissed 5/12/08. Prosper lost.

Case Number: 08C01750
PROSPER MARKETPLACE, INC. VS. RABOTEAUX, VALENTINO
Case filed 4/21/08.
Summons was apparently never served.
Case dismissed 10/10/08. Prosper lost.

Case Number: 08E04908
PROSPER MARKETPLACE INC. VS WEST, JAMES
Case filed 4/28/08.
Summons was apparently never served.
Case dismissed 10/16/08. Prosper lost.

Case Number: 08C01411
PROSPER MARKETPLACE, INC. VS. BARBOZA, RICARDO
Case filed 4/01/08.
No indication that summons was ever served.
Case dismissed 9/24/08. Prosper lost.

Case Number: 08C01437
PROSPER MARKETPLACE INC. VS. MOFFETT, CRYSTAL
Case filed 4/01/08.
Summons served on Robert Moffett. Proof of service filed 5/8/08.
On 8/11/08 the court clerk rejected Prosper's request for summary judgement. Sounds like some piece of documentation was missing from Prosper's request. I presume they'll try again.
In process.

Case Number: BC388361
PROSPER MARKETPLACE INC VS SHI LI PARK
Case filed 4/02/08.
Summons served and proof of service filed 6/19/08.
Plaintiff (prosper) asked for default judgement on 7/16/08.
Proceeding held on 10/29/08, and "continued" to some future date.
In process.

Case Number: 08K08483
PROSPER MARKETPLACE INC VS COLLET, LOUIS
Case filed 4/02/08.
No indication summons ever served on defendant.
Case dismissed 10/27/08. Prosper lost.

Case Number: 08K08484
PROSPER MARKETPLACE INC VS RIVERA, ROBERT
Case filed 4/02/08.
Summons served and proof of service filed on 7/07/08.
Court clerk rejected Prosper's request for default judgement 9/23/08. Doesn't say why. I presume this is another documentation problem, and that Prosper will resubmit, although a month has gone by and they have apparently not yet done so. In process.

Case Number: 08C01110
PROSPER MARKETPLACE, INC VS. CARR, CHRISTOPHER
Case filed 4/01/08.
Proof of service filed 7/07/08.
Court entered judgement against Carr for PRINCIPAL $ 13478.11 . ATTORNEY FEES $00.00 . INTEREST $ 2692.39 . COSTS $ 350.00 . TOTAL $16,520.50 .
Writ of execution issued to Los Angeles County on behalf of Prosper 9/12/08. (Legal thing telling law enforcement that you can take assets.) Prosper won!

Case Number: 08C01456
PROSPER MARKETPLACE VS. WOKE, CHINYERE
Case filed 4/01/08.
Proof of service filed 10/7/08.
In process.

Case Number: 08C01458
PROSPER MARKETPLACE VS. DELGADO, CARLOS
Case filed 4/01/08.
Proof of service filed 5/19/08.
The court clerk rejected prosper's paperwork on 9/08/08. The clerk's writing is terse, and best I can figure it seems that he believes that prosper filled out the paperwork wrong, asking for more interest than they were due.
The court clerk again rejected prosper's paperwork on 10/30/08, this time he seems to be complainng that some declaration was missing.
In process.

Case Number: 08C01457
PROSPER MARKETPLACE VS. DAVIS, DIANA
Case filed 4/01/08.
Proof of service filed 7/02/08.
Prosper asked for default judgement on 8/11/08.
Court clerk rejected prosper's paperwork on 9/08/08, complaining about wrong interest rate.
Prosper filed again on 10/01/08.
Status conference 10/06/08, continued to 4/14/09. I don't quite understand that, but there are no details available.
In process (I think).

Orange County Court
30-2008-00065226-CL-CL-NJC PROSPER MARKETPLACE, INC. vs Mario Villanueva
Case filed 4/24/08.
Prosper filed proof of service of summons on 7/29/08.
Prosper requested dismissal of the case on 8/12/08.
Case dismissed 8/12/08. Prosper lost.

30-2008-00058684-CL-CL-HLH PROSPER MARKETPLACE, INC. vs Brandi Fitzgerald
Case filed 04/01/08.
No proof of service yet. If they haven't been able to serve the summons in 7 months, that's lookin' bad. Means they can't find the person. In process, but lookin' bad.

30-2008-00058438-CL-CL-NJC PROSPER MARKETPLACE, INC. vs Josephine Sharaba
Case filed 4/01/08.
No proof of service yet.
In process, but lookin' bad.

30-2008-00058436-CL-CL-NJC PROSPER MARKETPLACE, INC. vs Jermaine Massey
Case filed 4/01/08.
Summons served and proof of service filed 7/11/08.
Prosper requested default judgement on 8/12/08.
Court clerk rejected Prosper's paperwork on 8/19/08. Didn't give a reason.
In process.

30-2008-00058426-CL-CL-HLH PROSPER MARKETPLACE INC vs Teresita Spreen
Case filed 4/01/08.
No proof of service yet.
In process, but lookin' bad.

30-2008-00050023-CL-CL-NJC PROSPER MARKETPLACE, INC. vs Karen Rozier
Case filed 2/26/08.
Prosper filed proof of service "substitute" on 5/6/08. I don't know what that is.
Karen Rozier filed requests for waiver of fees and an answer to complaint on 5/14/08.
Prosper filed proof of service on 5/27/08.
In process.

So here are the totals, interpreting the facts that have been made public, of the cases that are easily visible:

Prosper won: 1 case
In process: 8 cases
In process, but lookin' bad: 3 cases
Prosper lost: 6 cases

Now it is entirely possible some of those "case dismissed" are not actually losses, but cases where the borrower coughed up money and got prosper to drop the case. However note that none of them say they were "settled". They just say "dismissed". It is just as likely that these are cases where Prosper discovered they were going after the wrong person, perhaps discovering that there was identity theft involved. Lenders have great interest in the possibility of identity theft, because Prosper has guaranteed our investments against identity theft, and in such cases, must pay off. Note that in several cases Prosper has been unable to serve summons. In other words they couldn't find the borrower to hand him a summons. Might mean that the borrower skipped town, but it might also indicate identity theft. We just don't know.

We just don't know, because Prosper has not made any of this transparent .

Not only has Prosper not told us investors/lenders the status or given us any information about these cases. Nine months after promising lenders a monthly financial accounting for these cases, it has delivered none.

I propose a more communicative approach. Prosper should keep Investors/lenders appraised of the status of their investments, and the actions prosper is taking on investors/lenders behalf.

The best discussion among prosper lenders is found at www.prospers.org . See you there.

Prosper.com - 10/15/08 late loan stats update

2008-10-17T00:00:00.000-07:00

Here's the october 15th, 2008 update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog.

These curves show loans that are >1 month late, however, you can read them as "default curves" because almost all Prosper.com loans that go 1 month late move on to default. See my discussion of Prosper's collections performance in earlier blog entries.

We continue to see horribly misleading newspaper and magazine articles saying that the default rate on Prosper loans is 3% or 4% or something like that. Investors can only make reasonable investment decisions after understanding the default behavior of Prosper.com loans. Prosper loans default at about 20% per year. You can clearly see this from the charts. Pick your favorite month. Look how high the curve has gone after the first year. About 20%, eh? Prosper loans default at about 20% per year, on the average, considering all Prosper loans. There is considerable variation from month to month. Look at the final chart, where the curves are slid to a common origin. Just look at the vertical line labelled 390 days. (That's 30 days after 360 days, because loan payments can't be 1 month late until you wait 30 days after.) You will see curves cross that line anywhere from 18% to 26%. (Some of the more recent months look like they will come in a little lower.) That's how many loans went bad in the first year. Pretty simple really. Journalists seem to get it wrong time after time. Somebody must be feedin' them bad info, eh? Perhaps they just copy bad data from each other .

At the time of this writing, prosper.com has shut down due to some not fully specified regulatory problem. Meanwhile, the ongoing loans still evolve, and the data is still available, so I will continue to update this charts .

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org/

Prosper.com - You got some 'splainin' to do

2008-08-23T00:00:00.000-07:00

Be careful what you say to the judge. It can get you into lots of trouble.

On July 25, 2007, prosper.com issued a loan to "Oakland Gaerke" for $25,000. (We know this from public bankrutpcy court records.) A couple of payments were made, but then payments stopped, and the loan is now long overdue (by something like 9 months).

Six months later, on Jan 23, 2008 Mr. Gaerke entered a chapter 13 bankruptcy proceeding in the Northern district of Ohio bankruptcy court. As part of that proceeding he filed complaints with the court claiming identity theft. (Gaerke's amended complaint of Apr 29, 2008.) He says his wife "Ashley Gaerke" took out the prosper loan (as well as a lot of other credit) without his knowledge. He says he's not responsible for these loans, and he wants the court to let him off the hook. (He wants the court to tell Prosper.com to go pound sand.) There's also a divorce in process. In short, this is now a complex mess.

Whether this is or is not identity theft is of great interest to prosper's lenders, because of prosper's identity theft guarantee. Prosper guarantees that it will repurchase loans from lenders in cases of verified identity theft. If this is identity theft, then lenders must be made whole. If this is not identity theft, then maybe lenders get nothing.

Prosper essentially stopped buying back such loans about a year ago. Lenders wonder whether there has magically been no identity theft in the past year, or the cases are simply hidden in the obscurity of non-public facts and ignored by prosper. There are very few cases where the facts become public. This is a case where facts are public, so lenders are watching closely.

I don't know whether identity theft occurred or not. I wasn't there. I don't know who's telling the truth. However I do want to delve into one small aspect of this mess: How prosper has chosen to respond.

As part of Mr. Gaerke's claim that the Prosper loan was identity theft, he says that Prosper never contacted him, and never verified his identity prior to originating the loan. I would have expected Prosper to defend itself against this charge, producing or at least offering to produce records showing how and when the fellow was contacted and his identity verified prior to loan origination. This verification is Prosper's duty, so I figured maybe they kept records, and could produce them. Maybe sworn statements from the verifier person, or recordings of phone calls. They didn't produce any of these things. Here's what they did...

Prosper chose to deny that Prosper ever made a loan!

Prosper's answer was filed with the court on May 30, 2008, by Prosper's lawyers Patricia Fugee and Gregory Nuti. The meat of the document says:

Loans in a total amount of $25,000.00 were extended to the Plaintiff by individual bidders using Prosper’s website (“Lenders”) and the funds were disbursed to the Plaintiff by Prosper through direct deposit to the joint checking account of Defendant, Ashley Gaerke, and the Plaintiff. Prosper acted as the Plaintiff’s authorized agent to procure loans in the total amount of $25,000.00 from various Lenders on behalf of the Plaintiff.
By way of further answer, it is denied that Prosper loaned any money directly to the Plaintiff or Defendant, Ashley Gaerke.

They're claiming that Prosper never loaned money to Gaerke! They're claiming that the Prosper members who bid on the loan (those folks Prosper calls "lenders") actually loaned the money to Gaerke, and Prosper only acted as an agent to procure these loans from "lenders". In other words, they're effectively saying to the judge, "Hey, this guy has named the wrong defendant in this action. We're not the right guys. This guy should have named the 50 lenders as defendants, not poor little us. We're just the middleman."

I guess you'd call that a "technical defense". Lawyer's soft shoe. Instead of engaging on the issues, you find some techncal point that the plaintiff got wrong, like "He hasn't proved that I'm the guy who should answer for that." There are several problems with this position that Prosper thru its lawyers Patricia Fugee and Gregory Nuti have taken. The most blatant problem is that it isn't true. This position is the exact opposite of rather clear language in written legal agreements between Prosper and its lender members.

Lets examine some of those legal agreements, so we'll know how Prosper actually works. We can then compare that with Fugee and Nuti's statement above.

The most important agreement is called the Lender Registration Agreement (LRA). It defines how Prosper's "lender" members and Prosper interact, and each parties roles. Prosper has changed this agreement many times, but with a little digging, I believe I've found the version of the agreement that was in use mid-2007.

We don't have to look far to find wha the LRA has to say about this issue. It is so important that it is discussed in the very first paragraph at the top of page 1.

Note: Your role as a Prosper "lender" is that of a loan purchaser, and your rights and obligations as a purchaser or prospective purchaser of Prosper loans are set forth below. Although you are referred to in this Agreement and on the Prosper website as a "lender," you are not actually lending your money directly to Prosper borrowers, but are, instead, purchasing loans from Prosper.

Well that's pretty darn clear. Prosper "lender" members buy the loans. We don't lend the money to the borrower directly. Us "lenders" just purchase them. In case there's any ambiguity, they go on and explain who does the lending, and who sells the loans to us.

All loans originated through Prosper are made by Prosper Marketplace, Inc. from its own funds, and then sold by Prosper to the winning bidder or bidders on the listing.

Explicit. Prosper makes the loans from its own funds, then sells 'em to us. If that weren't explicit enough, they go on to tell us why it is done this way.

Prosper is the originating lender for licensing and regulatory reasons and is licensed in all states where licensing is required. Prosper uses the term "lender" instead of "loan purchaser" for the sake of brevity and simplicity, and for the convenience of Prosper users who appropriately view Prosper as a marketplace for connecting individuals who wish to borrow money, with people who have money and the desire to fund loans to other individuals.

Ok, so not only is it done this way, but it has to be done this way, because of lending regulations. It couldn't get much clearer than this.

The next agreement of interest is the "promissory note". Several of these are drafted for every loan that Prosper makes. One contains the name of each "lender" member. Prosper also changes the form of these documents from time to time, so I examined one from mid-2007. The first three llines of the document tell the story. Prosper writes:

Promissory Note
Borrower: xxxxxxx (Real name and address not displayed)
Lender: Prosper Marketplace, Inc. (Assigned to: xxxxxxx)

The Promissory note clearly identifies "Prosper Marketplace" as the lender, and goes on to say that the note has been assigned (ie sold) to the lender member. (I've x'd out the names of the actual borrower and lender members.) Prosper has issued many thousands of these documents, and they all identify Prosper Marketplace as the lender. This could not be more clear.

With these facts clear, how can it be that Prosper's lawyers have told the court the exact opposite?

If Prosper's statement to the court is truthful, then Prosper loans would appear to be in violation of various lending regulations, and Prosper would have acted in violation of its legal agreement with its "lender" members. If on the other hand, Prosper's statement to the court is not truthful, then ... What's that word for when you lie to the judge?

In summary (and with apologies to Ricky Ricardo) :
Prosper, you got some 'splainin' to do!

Reference materials:
Documents that were filed with the bankruptcy court are available to the public via www.pacer.gov I have copied here a few documents relevant to this discussion for your convenience..

Mr Gaerke's amended complaint
Prosper's response to Gaerke's amended complaint
Ms Gaerke's response to Gaerke's amended complaint
Prosper LRA, circa mid-2007

Prosper also filed an 'S1' with the Securities and Exchange commission on Oct 1, 2007, disclosing the Prosper loan process in great detail. I haven't quoted it here, but on the matter at hand it is consistent with the LRA. You can find the Prosper 'S1' at www.sec.gov .

Notes:
I have avoided mentioning the Prosper listing# or loan# or the borrower's Prosper screen name here, to comply with Prosper's wishes that borrower's screen names remain anonymous, in other words not be associated with the borrower's name.

PS: I don't take credit for finding this. I learned about it in an active online discussion about this loan among prosper lenders .

Prosper.com - lender statements now 7 months late

2008-08-22T00:00:00.000-07:00

In early 2008, $735,000 of late prosper loans disappeared from lender's statements. On 01/15/08, prosper promised monthly "supplementary statements" to lenders covering these loans. Hasn't happened. No statements have been produced. By my count, Prosper.com is now 7 months late on delivery of these statements to lenders, on the status of OUR loans.

This is simply one example of a much larger problem. Prosper management refuses to accept their responsibility to lenders. Once loans go late, they don't lift a finger. In this case, that includes not even telling lenders the status of collection efforts on these loans.

Shame. Over and over again. Shame.

For a more detailed explanation, see http://www.prospers.org/blogs/Fred93/2008/08/03/prosper_com_lender_statements_6_months_l

Prosper told us they would take legal action against the 68 late borrowers in this "legal test" group of loans. Today, eight months after they started the "legal test", many of the defendants have not even been served (with legal papers initiating a suit). We can tell that by observing the county court web sites, some of which display this information. Judging from the filings we can observe, it looks like about half of the suits haven't been served yet, eight months after the program began. You could never tell this by looking at statements provided by prosper, of course, because there are no statements, even tho they promised them! There aren't even excuses!

Shame. What a way to run a company.

Where do they get the chutzpah to act this way?

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org

Prosper.com - lender statements 6 months late

2008-08-03T00:00:00.000-07:00

Supplemental statements tracking $735,000 of loans were promised monthly, and are now 6 months overdue.

Prosper's 01/15/2008 email promised ...

Since this is a test, we have not yet designed the system to track these revenues within the normal statement process. As such, the loans will be defaulted at zero value and the accounting provided on a monthly basis in a supplementary statement.

However, Prosper has never bothered to send lenders any of these promised supplemental statements! $735,000 of loans have simply disappeared from lender's view.

That's right. No statements. No reporting. Prosper has kept lenders completely in the dark on the status of these loans. I figure January's promise of monthly statements should have produced one in February, and another in March, April, May, June, and July. That makes them now 6 months late.

Fact is, with great effort lenders can track the status of some of these lawsuits. This happens because many courts make some lawsuit status details public via their web sites. (Not all courts make status available online, so we can't see the status of all of them, without travelling around to the various county courts, and checking the records manually.) The visible status isn't pretty. Most of the suits weren't filed until April. Four months later, many of these suits have not even been served against the borrowers. Among the suits that have been served, it appears that none has yet come to trial.

It looks like the entire legal test has been horribly underfunded by Prosper. Now seems more likely that it will be aborted rather than serve as a symbol of Prosper's strength and a deterrent to deadbeat borrowers.

PS: The best discussion among Prosper.com lenders can be found at
http://prospers.org

Prosper.com - 08/01/08 late loan stats update

2008-08-02T00:00:00.000-07:00

Here's the August 1st update to to my Prosper.com late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog.

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org/

Prosper.com - collections - you have forsaken lenders

2008-07-26T00:00:00.000-07:00

Collections on late prosper.com loans are getting worse. Prosper simply doesn't take their responsibility to lenders seriously. Along the way there have been words from Prosper saying they were going to improve this or that, but they've all been hollow. Ding ding .. nobody's home.

Here's the latest data on collections performance, direct from prosper.com. Most late Prosper loans are sent to the collection agency Amsher. To keep things simple, I've graphed only Amsher's performance here. I've shown the fraction of loans sent to Amsher that have been cured. These numbers come directly from Prosper's web site, with no manipulation whatsoever. Prosper breaks this statistic down into three categories, according to credit grade, and that's what you see in the graph.

Prosper switched to Amsher, and dumped a bunch of loans on them, on 2/23/08, so of course the fraction of those loans that Amsher had cured on that date was zero. It took a couple of months for the stats to recover from that initial impulse, and to climb the learning curve, in other words learning how to collect Prosper loans. Well, according to this data, the honymoon is over. Since 6/1/08 Amsher's stats have been going down.

It wouldn't be so bad if there had ever been any good performance here, but Amsher never did anything good (according to the stats Prosper.com has published).

In fact, according to Prosper's stats, Amsher has never done as good as Penncro, the collection agency it replaced. Now how the heck can that be? In some of my earlier posts on this subject I've included a graph showing combined Penncro+Amsher performance. This is the all-time performance of loans worked on by either or both. This representation eliminates the startup impulse problem in the above graph. However, it involves some manipulation of the data, which confuses some folk. Here's an update on that graph:

This curve changes from blue to red when the handoff from Penncro to Amsher occurred. As you can see, Penncro got up to over 17% cured, and Amsher has been mostly downhill from there. As the number of loans handled by Amsher has increased, their lower cure rate has started really pulling down the combined curve. The explanation of how the data is combined can be found here.

How (expletive deleted) could things be this bad? Prosper management has made comments over the past few months about how collection statistics are improving. The stats Prosper.com gives us, on the other hand, are getting worse. What's the deal?

I put this question to Prosper management in mid-June. They said they'd have to look into the numbers and get back to me. I'm sure they ment to do just that, but no answers have been forthcoming. Perhaps higher priorities intervened. Ain't it always the way.

One possibility is that the numbers Prosper displays on the web site may be faulty. It wouldn't be the first time. Prosper used to display a statistic they called "net collected". There's still a row with this label on the web site, but they no longer fill in the numbers. I used to graph this statistic vs time, and as a result, I knew it was ... well ... I suppose the polite word is "bogus". This was discussed at length in the old prosper.com forum. Here's a chart I made about a year ago:

The red curve jerked up and down faster than was physically possible. From that I knew it was bogus. Prosper never did admit there was a problem. They just deleted the statistic from their web site. Well maybe that is an admission.

With that precedent in mind, is it possible that the collection statistics they provide for us now are just wrong? I don't know. I look forward to some feedback from inside Prosper.

If the numbers correctly reflect collection activity, then how the hell could it be that they are so horrible? When a loan goes 1 month late, I'd expect it to recover a significant fraction of the time. Amsher's 6% is not my idea of a significant fraction of the time. In fact, I'd expect more than 6% of 1-month-late loans to recover all by themselves, without any collection activity at all.

Something is horribly wrong.

Nobody seems to be doing anything about it. Seems like nobody cares.

Prosper, you have forsaken us (lenders).

See my prior writings on this subject, including:
Written 05/06/07: Collections is broken
Written 05/04/08: Collections is not improving

Update 08/08/2008: Just got a note from Prosper saying they have found and corrected a major bug in the way they were calculating the collection statistics they present on the web site, and believe that there is an additional problem, for which they are continuing to search. So... It looks like the data they were giving us was indeed faulty.

Prosper.com - 07/01/08 late loan stats update

2008-07-04T00:00:00.000-07:00

Here's the July 1st update to to my late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog.

An important factor in prosper.com loan results is how well Prosper collects the payments due on these loans once have become late. Please see my prior writings on that subject, including:

Written 05/06/07: Collections is broken
Written 05/04/08: Collections is not improving

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org/

Prosper.com - lender lawsuit

2008-06-25T00:00:00.000-07:00

A group of prosper.com lenders has retained counsel, and started the process to take legal action against prosper.com, with the letter copied below. While I have not signed on to this letter or this action at this time, I do agree with much of what they have to say. There is a considerable overlap between the issues raised in this letter and the issues I have been writing about for the last 2 years. The letter, sent by the group's legal counsel to Prosper on June 3, 2008, asked for a response by June 24, 2008. Apparently prosper chose not to respond.

The group has made public this first letter to Prosper, and I am copying its contents below.

June 3, 2008

Edward A. GiedGowd, Esq.
Chief Compliance Officer and General Counsel
PROSPER MARKETPLACE, INC.
111 Sutter St, 22nd Floor
San Francisco, CA 94104-4540
Phone: (415) 593-5418
Fax: (415) 362-7233
e-mail:

RE: INCREASED RISKS OF LOSS AND ACTUAL LOSSES CAUSED BY PROSPER'S FAILURES

Dear Mr. Giedgowd:

I represent a group of Prosper lenders who are frustrated about the platform and its nonresponsiveness to lender concerns. This letter summarizes these lenders’ major concerns, and proposals for addressing them. This letter is sent with the hope that these issues will be resolved quickly and informally.

I. Failure to Provide Accurate Information About Risks Presented By Certain Locations or Types of Loans

It has become apparent to lenders that Prosper has permitted loans to originate in states where it cannot or will not make meaningful efforts to collect on late loans. Prosper has not informed lenders of the difference in debt collection laws of the various states, nor how Prosper permits these different laws to impact its performance of its fiduciary duties to lenders. Prosper apparently is also more interested in pursuing collections on larger loans than on smaller loans. Prosper has not informed lenders that the difference in state laws, or in Prosper’s own collection practices, may impact Prosper’s fiduciary duty to collect lenders’ funds in the event of delinquency, or that sales of those loans upon default may result in lower prices.

This information, and any other information Prosper has collected about trends from various states or types of loans or that is otherwise material to a lender’s decision to bid on a listing, must be provided to lenders.

II. Poor Collections Results

Lenders have been expressing concern about the extremely poor collection performance for more than a year. (See, for example, http://www.prospers.org/blogs/media/blogs/Fred93/open letter number 2.pdf.) Adding to that concern is the lack of any information – specific or general – about the status of collections on particular loans. My clients have not been furnished with any information about efforts to collect on their late loans, including whether the collection agency has even successfully contacted the delinquent borrowers. This is unacceptable. Prosper, as my clients’ loan servicer, must immediately amend its policies and procedures to provide lenders with specific information about the efforts made to collect on the loans, including the borrowers’ stated intent with respect to repayment. That information must be provided along with all other data about loan payments.

If a borrower has sent a “cease and desist” letter to the collection agency, Prosper must assume responsibility for collections, and for informing lenders of the status of those efforts.

In addition, lenders have repeatedly raised concerns about “blenders,” borrowers who are also lenders, with late loans. The LRA, and all other appropriate legal documents, must be amended immediately to provide Prosper with the right to withhold payments due to blenders whose loans are more than fifteen days late, and apply those payments to the blenders’ overdue loan balances. Prosper already promised lenders in writing on March 2, 2007 that "If one of them defaults, we'll find a way to take the gains from the borrower's lending portfolio and give it to lenders on their loan." Demand is hereby made that Prosper rectify its breach of this promise by paying the lenders on every such loan their pro rata portion of the blender's own lending account that should have been, but wasn't, given to them when the blender defaulted.

III. Failure to Sell Defaulted Loans

My clients are dismayed by the increasingly large portfolio of non performing loans on the platform, and Prosper’s refusal to sell them. The LRA currently states:

Except in the case of borrower bankruptcy, Notes that become over 120 days past due are charged off and offered for sale to an unaffiliated debt buyer authorized and willing to purchase consumer loans. You authorize Prosper to offer for sale and sell your Notes that become over 120 days past due to a debt buyer in accordance with this Section. Because debt purchasers buy many past due Notes at once, Notes that are in default might not be offered for sale at the point at which they are exactly 120 days past due, but may remain unsold for some period after they are 120 days past due.

Many lenders have loans that are eight or nine months past due, or more. The older these loans become, the less they are worth – and the more likely the borrowers are to file for bankruptcy. Prosper controls the timing of the debt sales, and does not appear to be abiding by the terms of the LRA.

It is particularly troubling that one offer to purchase a delinquent loan at twice what the junk debt buyer ultimately paid was unjustifiably rejected by Prosper. That demonstrates that Prosper may not be putting its lenders' interests first, as Prosper's fiduciary duties to its lenders require it to do. Demand is hereby made that Prosper immediately sell all loans that are delinquent by more than 120 days, unless the borrower has made a payment of at least one month’s principal and interest in the prior thirty days, or there is some other individualized reason that Prosper reasonably believes that holding that loan out of the debt sale is in the lenders' best interests. That reason must be disclosed to lenders. In addition, demand is hereby made that Prosper reimburse each and every lender on loan 4018 the money that Prosper's improper rejection of the high bid for that defaulting loan cost them. If Prosper wishes to accept a low bid, rather than a higher bid, then Prosper, not the lenders, should suffer the loss caused by that decision.

Prosper’s failure to hold quarterly debt sales has resulted in clear harm to lenders. Prosper last sold defaulted loans in December, 2008, and the sales price was substantially less than at the prior sale. Prosper apparently attempted another debt sale in late April, 2008 (a month later than it should have), where the bids were substantially lower than in December. Instead of selling the loans for the best price Prosper could get (as its fiduciary duty and the LRA obligated it to do), Prosper permitted the loans to age even longer, devaluing the older debt even more, and in late May, 2008 was apparently offered less than half of what it had been offered a month earlier.

Demand is hereby made that Prosper treat all loans that were 121+ days late as of the date of the December debt sale as having been sold in March, 2008. To that end, Prosper must provide very specific detail about the debt sale proceeds received in December, 2007 and the bids made in April and May, 2008 so lenders can determine a fair price.

Prosper has recently notified lenders that the bids it received to buy defaulted loans in May were either very low or attached conditions that Prosper deemed unacceptable. Prosper must specify, in detail, the “conditions” that made the May, 2008 bids unacceptable to it, and explain why it rejected those bids. With respect to all debt sale negotiations in 2008, Prosper must disclose the identity of the debt bidders and buyers to the lenders, as well as the terms of each offer so that the lenders can verify that Prosper did, indeed, make a commercially reasonable effort to obtain the best possible price for the loans. Further, for each effort to sell the debt, Prosper must disclose to lenders the identity of each bidder and the winning bidder on past sales, and every potential debt buyer that Prosper notified of the upcoming sale in an effort to solicit bids.

In another express violation of the LRA, Prosper apparently no longer intends to hold debt sales, instead planning to have some unspecified person “apply” unspecified “charge off collection techniques” to debt that is 121+ days old. Prosper cannot unilaterally decide that it is in the lenders’ best interests despite the terms of the LRA for these loans to be subjected to “charge off collection techniques.” Instead, should Prosper wish to deviate from the terms of the LRA, Prosper must provide lenders with detail about these proposed “techniques,” including, at a minimum, what they consist of, who will “apply” them and what the cost to lenders will be. Then, Prosper must permit lenders to opt in or out of this experiment. And, in the future, Prosper must hold debt sales at least quarterly. If the current method of conducting debt sales does not provide Prosper with a mechanism to dispose of non performing loans, Prosper should investigate alternative means of debt sales, perhaps even in the form of a secondary auction on its platform, open to all qualified buyers.

IV. Failure to Prosecute “New Agency Test” Lawsuits

Last year, Prosper invited lenders to opt in or out of a series of planned lawsuits against 66 borrowers whose loans were more than four months late. The lenders who opted in to these suits have not been told whether suit has actually been filed on each of the loans. It appears that where suits have been filed, they most likely have not been served, since very few proofs of service have been filed with the courts. It therefore appears that the cases have not been litigated aggressively – or, in most cases, at all. The LRA instructs lenders not to contact Prosper’s collection law firm, yet very little information about the prosecution of these cases has been provided. Any unserved lawsuit must be served immediately, and, if service is unsuccessful, Prosper’s counsel must take prompt steps to obtain leave of court to serve the complaints via publication. If an answer is filed, Prosper should promptly evaluate the action for summary judgment.

Further, information about the status of these actions must be provided to all lenders, and updated at least monthly.

V. Failure to Protect Lenders’ Interests After A Borrower Claims to Have Declared Bankruptcy

Prosper's fiduciary duty towards its lenders requires that Prosper act in a manner that is most likely to protect the interests of lenders on loans where the borrower has filed or states their intention of filing for bankruptcy.

Prosper has admitted, in writing, to treating loan 2139 (listing number 23444) as being in bankruptcy for more than a year based solely on the borrower’s claim that she was “going to” file. Prosper did nothing to verify the borrower’s claim, and has not yet sold that loan. The loan continues to show that it is both in collections and in bankruptcy, and the lenders do not know whether it truly is. Whether or not this borrower ultimately filed a bankruptcy petition, the lenders on this loan suffered monetary damage as a result of this loan not being sold timely, both in terms of lost interest and in terms of the diminishing amount debt buyers are willing to pay for Prosper loans. Demand is hereby made that Prosper reimburse all lenders on that loan in at least the amount they would have received had the loan been sold timely, together with interest thereon.

Similarly, loans 1323 and 7107, likely among many others, show they are simultaneously in collections and in bankruptcy, suggesting that Prosper has relied solely on the borrower’s stated future intent to file. A recent PACER search did not turn up any bankruptcy filing by the borrower on loan 7107.

These loans highlight the harm caused to lenders by Prosper taking the unsubstantiated word of borrowers. While lenders are aware that Prosper intends at some unspecified future date to provide information to lenders about the petition filing date and chapter, that is inadequate. Prosper must verify that the petition has been filed, and must file all documents needed to protect the interests of the lenders. Prosper must also file appropriate documents to perfect the lenders’ claims, must challenge the dischargeability of any loan obtained fraudulently or too close in time to the bankruptcy filing, and must verify that the bankruptcy actually results in a discharge of the Prosper loan. If the bankruptcy petition is dismissed, Prosper must notify lenders of that, and promptly recommence collection activity, or sell the loan as defaulted.

Prosper must provide the following documentation of any loan in bankruptcy on the loan information pages on its website: (1) the date and chapter of the petition; (2) the steps Prosper has taken to protect the lenders’ interests; (3) the status of the bankruptcy; and (4) whether the bankruptcy has been discharged. Prosper must also provide lenders with a detailed summation of the adversary proceedings or other challenges it has made, and the outcome of those filings.

If no bankruptcy petition has been filed, of course, Prosper and its agents must continue collection efforts on the lenders’ behalf. Borrowers should not be permitted to avoid collection efforts and their repayment obligations while they consider how best to address their financial situation, as this is to the lenders’ clear detriment. Prosper must treat all loans as being delinquent until it is furnished with paperwork from the Court establishing that a bankruptcy petition has truly been filed.

VI. Failure to Honor Repurchase Guarantee

Lenders have identified cases of apparent identity theft after loans go late. One example is Listing No. 102017, where the borrower represented himself to be a woman who had a credit history extending back 12 years and a six-figure income. In reality, the borrower was a 22 year old man. Prosper inexplicably refused to honor its identity theft guarantee on this loan. Please honor that guarantee immediately.

Additionally, there are many loans where the borrower never made even one payment, or where a borrower made two or fewer payments. Prosper must diligently investigate potential identity theft with respect to those loans (which include, without limitation, the loans resulting from listings 102580, 137658, 140191, 179350 and 208191) and advise the lenders on those loans, with specificity, about the outcome of the investigations. If identity theft is found, Prosper must promptly honor its repurchase guarantee.

Lenders are also concerned by the fact that Prosper has essentially stopped repurchasing loans under its identity theft guarantee. To date, Prosper has repurchased 122 loans. These include the 66 New Agency Test loans and a handful of loans Prosper repurchased due to credit data issues. Thus, roughly fifty loans were repurchased by Prosper for other reasons (which we presume include the identity theft guarantee). Prosper has repurchased only one loan that originated after August 1, 2007 despite the fact that more than 40% of all Prosper's loans originated after that date. It is extremely unlikely that there has only been one identity theft loan in all that time; it is far more likely that the near complete absence of repurchases is due to the "success" of Prosper's strenuous efforts since last summer to deprive lenders of the information they formerly used to discover numerous fraudulent and identity theft loans on their own. As you know, many of the loans Prosper repurchased were identified by lenders through discussions on Prosper's own forums, before Prosper eliminated those forums and stripped basic information from the listings. Because Prosper knows that its conduct has severely impaired the ability of lenders to ferret out fraud, it has a fiduciary duty to increase its own efforts to determine whether the listing was fraudulent in any manner. Instead of fulfilling that duty, it appears that Prosper may have used this as an opportunity to cease having to spend its own capital repurchasing fraudulent loans. Please be aware that we intend to vigorously pursue discovery on this and other topics should further action be required to protect lenders' interests.

VII. Failure to Protect Lenders From Other Instances of Borrower Fraud

Prosper’s fiduciary duty requires Prosper to protect lenders from garden variety fraud, as well. That includes borrowers who take out loans with no intention of repaying them, such as the loan resulting from Listing 71273, which funded after lenders warned Prosper that the borrower had posted his lack of intent to repay the loan as well as admitting that he lied about the purpose of the loan. Not surprisingly, after Prosper permitted this loan to fund, the borrower defaulted.

Prosper must investigate all listings reported as fraudulent. Prosper must investigate all reports of suspected fraud before permitting loans to fund. Listings 18121 and 71273 provide but two examples of loans that originated despite many well supported reports of suspected fraud, then subsequently defaulted. Demand is hereby made for a full explanation of Prosper's investigation (or lack thereof) of these reports of fraud on these listings, and why Prosper believes (if it does) that its investigation was "commercially reasonable" as required by the Lender Registration Agreement (“LRA”). Needless to say, if Prosper's investigation was not commercially reasonable, Prosper must reimburse all lenders on these loans (and any other loans that were permitted to fund despite reports of fraud) for their losses.

VIII. Failure to Provide Accurate Performance Information

Prosper misrepresents the value of lenders’ portfolios, both on each lender’s individual overview page and on its Marketplace Performance page. On the lending overview page, the interest rate is artificially inflated since it does not take into account the lack of interest actually paid on late loans. Prosper could easily correct this misleading information, since at least two third party sites (www.lendingstats.com and www.ericscc.com) provide more accurate – and significantly lower - estimated rates of return than does Prosper.

With collections remaining at less than 20%, Prosper must adjust the manner in which it reports account values to lenders. A loan that is four months late is worth significantly less to a lender than one that is two days late. Loans in bankruptcy likely have no value. Despite this, Prosper portrays all loans, regardless of their status, at full face value, including accrued interest and late fees, which substantially overstates the portfolio's real value. Prosper must provide lenders with more accurate loan valuation.

Prosper must immediately cease providing lenders with inflated interest rate data and inflated loan valuations. Prosper must disclose the number of bankruptcies on the lender overview page, and must value them accordingly. Once a loan goes more than thirty days late, it must be valued in the lenders' portfolios at the discounted value that represents the probability of curing. Loans that are subject to a debt sale (+4 month loans) should be valued in lenders’ portfolios at no more than the proceeds obtained for a loan of that nature in the previous debt sale. If a loan is charged off it must be treated as having no value.

Similarly, Prosper must provide accurate information on its Marketplace Performance page, which it invites lenders to use “to figure out what kinds of borrowers will yield the highest return for your portfolio.” The data there is inaccurate, due, at least in part, to matters noted above. The failure to hold timely debt sales distorts that data, since loans that should be counted as defaults are instead counted as 4+ month lates. In addition, the New Agency Test loans are erroneously treated by Prosper as if they had never originated. Since these loans are by definition "defaults" in everything but name (indeed, for the lenders opting out of the New Agency Test, these loans are defaults, since these lenders were paid the pennies on the dollar that these loans would have received had they been sold at the last junk debt sale), they should be treated as defaults for all reporting purposes. Loans that Prosper charges off must be clearly identified on the Marketplace Performance page, as well, and must be treated as having no value for purposes of ROI calculations and lender bidding guidance. Under no circumstances shall "charged off" loans be treated like the New Agency Test loans are currently treated (i.e., as if they had never originated). Not surprisingly, Prosper’s actual results are substantially worse than reported. These misrepresentations must be corrected, and only correct data posted in the future.

X. Retroactive Changes to Terms of Service, to the Detriment of Lenders

Prosper has repeatedly amended the LRA and terms of service, until recently not even notifying lenders of such changes (much less obtaining lenders' consent). Needless to say, Prosper has no authority to unilaterally amend any agreement governing the relationship between the parties, particularly in a retroactive fashion.

One change that resulted in significant lender concern was Prosper’s unilateral decision to permit borrowers to obtain second loans without having paid off their first loans. Several lenders advised Prosper that the terms of service permitted only one loan at a time, and this change presented real increased risk. Prosper was urged to permit second loans only on first loans that originated after this change, and notification to lenders, so lenders could decide for themselves whether they wanted to assume this much greater risk. Prosper ignored the likely risk to lenders, and declined to permit second loans only on first loans that were listed after the amendments. Thus, lenders who bid with the certain knowledge that Prosper would only allow one loan at a time were suddenly faced with additional risk. Many lenders would not have made loans in the first instance had they known that Prosper might later permit second loans because of the additional risk.

This additional risk is evident with borrower "dbfunding," who first borrowed $15,000 (listing 29537), then, after second loans were permitted, borrowed another $14,650 (listing 228201). The loans now show they are in bankruptcy. At least with respect to those lenders who have not implicitly acquiesced to the new terms of service by continuing to lend, Prosper must immediately repurchase the first loan. When any similar situation arises in the future, whether the first loan defaults or files for bankruptcy, Prosper must immediately reimburse all lenders who have not loaned since the changes in the terms of service.

Prosper unilaterally decided to move collections away from Penncro to AmSher, which charges lenders a higher fee. At the time of this switch, Prosper promised that lenders would not be charged more than they would have been had the loans remained at Penncro. After it was pointed out to Prosper that notwithstanding its promise, lenders were actually being charged the higher AmSher fees, Prosper stated that this was due to a "coding error," and that Prosper would reimburse lenders the over charges. Apparently, no such reimbursement has yet occurred, despite months having passed. Demand is hereby made that Prosper immediately provide that reimbursement to lenders.

Prosper unquestionably has a fiduciary duty to lenders, which it has breached in many respects. The foregoing are areas where breaches have clearly and repeatedly occurred, and which must promptly be addressed to avoid litigation. I look forward to your written response, with the specific steps with which Prosper will address these concerns, by June 24, 2008.

cc: John B. Witchel
Christian A. Larsen
Kirk T. Inglis
James W. Breyer
Lawrence W. Cheng
Paul M. Hazen

A pdf scanned image of the letter can be found at http://p2pla.org/docs/4187_001.pdf

Discussion of all issues related to prosper.com can be found at http://www.prospers.org

Prosper.com - 06/15/08 late loan stats update

2008-06-16T00:00:00.000-07:00

Here's the mid-June update to to my late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog .

An important factor in prosper.com loan results is how well Prosper collects the payments due on these loans. Please see my prior writings on that subject, including:

Written 05/06/07: Collections is broken

Written 05/04/08: Collections is not improving

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org/

Prosper.com - 06/01/08 late loan stats update

2008-06-03T00:00:00.000-07:00

Here's the June update to to my late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog .

You can plainly see that Prosper loans are going bad at about 20% per year. Just look at the 360 day point on that last chart. As I've reported before, you will see many references in various newspaper and magazine articles that the Prosper loan default rate is 3% per year. These statements are just completely wrong. It is amazing how often this incorrect statement has been reprinted. Prosper's own data (as seen above) shows the correct number is about 20%/year.

The most recent repeat of the lie can be found in Lendoza's blog
http://www.lendoza.com/2008/05/28/marketplace-protection-collections-a-closer-look/ where he wrote:

we will assume that Prosper's numbers are accurate?.in which case there is a default rate of 3%

He obviously hasn't actually looked at the data. He must have simply copied that from one of the newspaper articles. Prosper's data does NOT show "a default rate of 3%". The only polite word for that is "wrong".

Zcommodore recently showed us another way to look at this same data.

http://www.prospers.org/blogs/zcommodore/2008/05/22/loan_aging_a_study_of_loans_over_time

You can read from his graphs a default rate of a little less than 2%/month. That's about the same as 20%/year I've repeatedly described.

An important factor in prosper.com loan results is how well Prosper collects the payments due on these loans. Please see my prior writings on that subject, including:

Written 05/06/07: Collections is broken

Written 05/04/08: Collections is not improving

Prosper has recently advised us that the most recent auction of old bad loans has failed, and as a result they no longer intend to auction off old bad loans. Failed. Dead. Nobody wants to buy the stuff! As a result of this, Prosper has told us that they intend to stop selling such loans, and instead apply "post charge-off collection techniques" while us lenders still own the loans.

This could be a very positive development. The old auction/sale process was very bad for lenders, as no one ever tried very hard to collect before the loans were sold, and the sale triggered very bad tax consequences for lenders. As I wrote about a year ago in Collections is broken I think this is an appropriate thing to do ... IF Prosper takes this responsibility seriously.

My concern, and the concern of many other lenders, is that Prosper will not take it seriously, as they have never taken their responsibility to lenders with any seriousness. I recently wrote about how slowly Prosper is proceeding with the legal test against 66 deadbeat borrowers. Will they proceed more gusto against 1000 or 2000? Or does "post charge-off collection techniques" mean letting old loans gather dust on a back shelf?

PS: The best discussion among Prosper.com lenders can be found at http://prospers.org/

Prosper.com - a mishandled loan

2008-05-24T00:00:00.000-07:00

Prosper.com is often sloppy when servicing loans. I'm going to show you an example. Its an anecdote to be sure, but there are many such anecdotes in the naked city.

Loan #2139 originated July 27, 2006. The one and only payment made by the borrower occurred a few days later on August 6, 2006. The loan is still hangin' around, now about 22 months late.

Prosper, by its stated policy, is supposed to sell loans when they are 4 months late. This one fell thru the cracks. It is unclear whether there has ever been any attempt by prosper to collect. Seems that during much of the past 2 years, Prosper assumed this borrower was in bankruptcy, when in fact he was not. Once a loan is coded as "in bankruptcy", it gathers dust on Prosper's back shelf, no collection attempts are made, and the lenders lose their money.

Back to the story. A lender, who shall remain nameless, sent me a copy of this dialog with prosper. The lender quoted below waited patiently 1.5 years and then begain a dialog with Prosper.

From:
To: support@prosper.com
Subject: Re: Other (I am a lender): Please explain below
Could someone please explain why this loan has not ever been included in the JDB sales? They have made ONE payment and that was a month after the loan originated and was over 1.5 years ago. If it is possible fraud, it seems that would have been discovered by not.
https://www.prosper.com/secure/account/lender/lender_loan_details.aspx?id=2139
Thank you

Here's Prosper's initial response.

From: "\"Prosper customer support\" <support@prosper.com>
To:
Subject: Re:Other (I am a lender): Please explain below [ ref:XXXXX:ref ]
Date: Jan 2, 2008 2:45 PM
Dear XXX,
Prosper recently selected some 4+ month late loans to be included in a new collections test. This test is still ongoing and therefore these loans were not sold. More information on the test will be release as soon as it is available in January. Thank you for using Prosper Marketplace.
For future reference, your Prosper support case number is XXXXXXXX.
Sincerely,
Prosper Customer Support
Join us for Prosper Days 2008: Prosper community members and...

Well, that response is incorrect. This loan wasn't in the new collections test. That's just a stock answer that the CS person grabbed for a quick response. That happens sometimes. Our friendly lender tries again...

From: XXX [XXX@XXX.com]
To: support@prosper.com
Subject: Re: Re:Other (I am a lender): Please explain below [ ref:XXXXX:ref]
Here's what I said the first time you sent me this email:

I don't think you understand. This borrower has not made a payment since AUGUST 06. That's over a year ago and it was the only payment they have made. Your new collections test wasn't instituted until the last few months. THIS WAS 120+ DAYS LATE OVER A YEAR AGO. Right now it is showing at Penncro, not the new agency and it's showing it has only been at Penncro for 2 months. Surely you see that there's a problem with this loan???

Not making progress with customer service, our lender sent a message directly to a prosper employee...

From: XXXX [mailto:XXX@XXX.com]
Sent: Friday, January 04, 2008 2:48 PM
To: aprosperemployee
Subject: Fw: Re:Other (I am a lender): Please explain below [ref:XXXXXX:ref ]
Hi XXXXXX - ... I'm hoping maybe you can get to the bottom of this. I can't tell if this is someone who filed BK, then had it canceled, got lost in the cracks, is a possible fraud case you guys were working on, knows someone who knows someone who knows someone or what. But obviously the response I received didn't address the issue.
To reiterate - they have made ONE payment. That was in August 06 - well over a year ago. It's never been sold and it's showing that it's only been in collections for 2 months.
Any illumination you can provide will be greatly appreciated since I'm pretty sure you're the only one there who knows what's going on, lol
Thanks,
XXXXXX

This time our lender got a response that actually tells us something about what happend to this loan...

From: Prosper customer support <support@prosper.com>
To:
Subject: Re: Re:Other (I am a lender): Please explain below [ ref:XXXXX:ref ]
Date: Jan 4, 2008 6:45 PM
Dear XXX,
This was a borrower who told us she was going to file bankruptcy, which kept her out of a couple of debt sales. Once we realized that she was not actually filing bankruptcy, we took the bankruptcy tag off of the loan, but it was too late to be included in the latest sale. According to our debt sale folks, we're going to try to include it retroactively in the last debt sale. Failing that, we'll include it in the next one.
For future reference, your Prosper support case number is XXXXXX.
Sincerely,
Prosper Customer Support
Join us for Prosper Days 2008: Prosper community members and...

Whoa! It appears that when a borrower tells Prosper that they're going to file bankruptcy, Prosper ceases trying to collect. This apparently happens whether the borrower has indeed filed bankruptcy or not. Then, when they discover their error (over a year later) they send the loan to the junk debt buyers. Well

You might be inclined to think that Prosper's collection agents are hard at work on this loan, but I'm not so sure. The customer service message above says the bankruptcy flag was removed but, even to this day, this loan is still flagged in Prosper's database as "in bankruptcy".

http://prospers.org/blogs/media/blogs/Fred93/2139prosper.jpg

If I were the collection agent for this loan, and I saw that flag, I would not call the borrower. It is reasonable to assume that Penncro and now Amsher have ignored this loan because Prosper's database shows it in bankruptcy, and that no collection attempts have ever been made.

Lenders have no transparency into the handling of late loans. This makes it difficult for lenders to check up on Prosper's handling of our loans. Only in extreme cases such as this do we learn a bit about what actually goes on.

Prosper, please take lenders seriously. Improve your handling of late loans. An external audit of the entire late loan handling process might be an appropriate jesture .

Prosper.com - here's what you should do with the lawyers

2008-05-18T00:00:00.000-07:00

When we invest in prosper.com loans, we make a deal with prosper. The lender buys the loan, and prosper retains the right to service the loan and charge a fee for that service. This would be fine if prosper did a good job of servicing loans, but they don't.

Don't get me wrong. Prosper has done many things right. The idea was great. They built an incredible web site. They just don't service loans well, which unfortunately is a critical thing.

In any other situation I can imagine, if I owned a loan, I could decide who services the loan. That way there would be competition. If my loan servicing guy proved to be incompetent, I could move to another loan servicing guy. This sort of competition drives everyone to be serious and pay attention to business. (Economics 101)

If you're locked in to one loan servicing guy, then what's his incentive to actually care about your loan?

In the case of Prosper, you might think the incentive would be that their survival ultimately depends on this. If, over time, the world learns that their product is bad, then no one will want their product. I'm not the only one who has said things like this.

John Witchel (Prosper CTO) wrote (in private correspondence) on 05/09/2007:

Prosper is heavily motivated to keep defaults in line. If they aren't tractable everyone's returns go to the dogs and Prosper fails, and there's no amount of "new blood" that will keep that problem at bay

Today 3,215 of Prosper's loans have gone in the toilet (ITT). I'm counting loans that have defaulted, as well as loans that are at least 2 months late, which by past Prosper performance means they will almost certainly end in default. In other words, these are loans where the lenders have been stiffed.

Prosper has originated 18,819 loans that are now at least 3 months old (ie old enough to be at least 2 months late). For the record, those 3,215 loans in the toilet are 17.1% of Prosper's total 18,819 loans old enough to be ITT. (Gosh I hope I don't read any more of those newspaper articles that say Prosper has a default rate of 3%.)

(You can get all these numbers for yourself from Prosper's performance web page, or from one of the third party stats sites, etc.)

But that 17.1% is not the really interesting fraction. Prosper has insulated itself from the loan-making decision, so some would say the high default rate is not entirely Prosper's fault. Read on.

For almost all of those late loans, all Prosper ever did was send the borrowers emails and phone calls, asking them to pay. In other words, Prosper did almost nothing. To be certain, there have been some small improvements. For example here's an improvement announced earlier this year:

Doug fuller quote (from prosper blog)...
http://blog.prosper.com/2008/01/04/doug-fuller-on-collections-1/

One of the many activities aimed at improving collections undertaken in the last couple of months was the testing and implementation of an ?Early Delinquency? letter series. Although borrowers were already receiving reminder emails and phone calls during the early delinquency period (1 -30 days past due), we thought it worth seeing if an actual letter might drive additional payments.

Oh boy! Now they send a letter. An improvement. But ... Frankly, a letter ain't much, and Prosper's collections is still super-wimpy. Prosper management just doesn't take this stuff seriously. They don't take handling your money seriously.

When Prosper was conceived, the founders didn't realize that bad loans, deadbeat borrowers, defaults and collections would be such a bad problem. They had a notion, now proven to be incorrect, that the "community" aspects of Prosper would create loans which went bad at a lower rate than other consumer loans, credit cards, etc. That aspect was widely hyped to lenders. (Remember those web pages where they talked about Joe the fireman, and how after he joined the fireman's Prosper group he would feel an obligation to all other firemen, so would keep his loan current?) Turns out: It ain't so.

I don't fault the founders for getting this wrong. In every startup the founders envision some future business, an act which forces them to predict how the future will turn out. As the saying goes "Predicting is really difficult. Especially the future." Some part of the vision is always wrong. You have to adapt. Prosper management hasn't adapted.

(And for the record, I still believe there is value in the community aspects of Prosper. Its untapped. I'll write about that in a future blog.)

To be fair, they have made changes which attempt to reduce the rate at which loans go bad. They added a post card to verify the address of the borrower. They increased the lower bound on credit score for HR borrowers, to cut off some of the really bad credit risks. Finally they added bidding guidance in an attempt to scare naive lenders away from high risk loans. Good stuff... but no real improvements in the collections department, where thousands of loans sit rotting.

Because the Prosper founders didn't think collections would be much of a problem, they didn't devise a good method to fund collection activities. The existing legal documents (lender agreement, borrower agreement) don't provide mechanisms that would fund legal action against borrowers, even when it is clearly in the interest of lenders. In other words, we have lenders willing to pay for action, but Prosper unable to act. Prosper could have adapted, and changed these agreements, inventing the new mechanisms to fund the functions they now saw were needed, but they have not. They're still tryin' to run collections on the cheap.

More discussion about funding collections can be found in my Open letter #2 to Prosper management, written almost exactly a year ago. Much of it is still on point.

Lets get back to those 3,215 loans in the toilet. 1,458 of those have already defaulted, ie were sold to junk dealers, so they're gone, and there's nothing we can do about them. The remaining 1,757 in the toilet loans are still in Prosper's hands, and they could do something about those, if they had the desire to act.

They have taken some action, but I want to show you how tiny that action is. Back in January '08, Prosper started a "legal test" where they took 66 very late loans, in California only, and initiated legal action. Oh boy! There are several small problems.

First, that's 66 out of (1757+66) = 3.6% ! They only initiated legal action against 3.6% of the late loans in their hands that are in the toilet.

Are you a lender on some of the other 96.4%? Sorry. Your loans are going to default. Nothing is being done. The "legal test" should be 10 times larger.

Second, I said they "initiated" legal action, but that's almost too strong a word. Remember the project started in January. In May they filed the first "proof of service" documents with some of the courts, meaning that the complaints have actually just now been served against some of these deadbeats. Slooow. No requests for summary judgement have yet been filed. No court dates have yet been set. If we run at this pace, it will take a year before we have any results. During that time, more thousands of loans will default due to Prosper's inaction. This is irresponsible. This may be the most economical way to proceed, but it is not the most responsible.

Here's my request of Prosper's management:

You have, in your hands, 1,272 loans that are 4+ late. (For the record some of this group are as much as 10 months late, such as loan #901.) Establish objective criteria to pick half of those loans that are worthy of legal action, in other words about 660 loans, ten times the size of the existing legal test, and begin legal action on them immediately. Take lenders, and your obligations to them, seriously.

Make the changes in the legal documents required to allow you to fund this legal activity while complying with the terms of the documents. This won't help you for the existing loans, but at least it gets you straight with the lawyers for future loans.

Oh, and please make the process transparent.

Prosper.com - 05/15/08 late loan stats update

2008-05-17T00:00:00.000-07:00

Here's the mid-May update to to my late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a chart of the same data in which each curve has been slid to the left to a common origin. The horizontal axis is now days since loan origination month.

Explanation of methodology can be found in my prior postings in this blog .

An important factor in prosper.com loan results is how well Prosper collects the payments due on these loans. Please see my prior writings on that subject, including:

Written 05/06/07: Collections is broken

Written 05/04/08: Collections is not improving

Prosper.com - the lawsuits begin

2008-05-06T00:00:00.000-07:00

Grant Wanapat, Jerald Teixeira, Holly Brown, Valentino Raboteaux, Ricardo Barboza, Crystal Moffett, Shi Li Park, Louis Collet, Robert Riviera, Christopher Carr, Chinyere Woke, Carlos Delgado, Diana Davis, Victoria Crawford, Mario Villanueva, Brandi Fitzgerald, Josephine Sharaba, Jermaine Massey, Teresita Spreen, Karen Rozier, Coleen Alexadria Dacey, Krag Pappas, Teresa Calvert, Lovel Hoxie, Deniece Todd, Kimberly Jones, Vickie Brown, Michelle Wiese, Rory Manning, Jeremy Brom, Lynn Horton, Del Phillips, Mark Dionne, Chona Dionne, Oscar Monge, Gregory Kolesar, Roger Treskunoff, Lavina Lewis, S. White ***

Question: What do these people have in common?

Answer: They have all been sued by Prosper.com, for not paying back their loans.

I have good news and bad news for lenders.

The good news is that legal action is finally happening. We've waited a long long time for this, and its good to finally see some serious action against deadbeats who have stiffed us. Prosper's collection activity up to this point has consisted of phone calls, with the recently added modern technological innovation of a letter asking deadbeats to repay.

The bad news is that the legal test project is very small, and is moving at a snail's pace. Lets review the schedule, so you can see what I mean.

01/15/08 -- Prosper sent many lenders an email message asking them to "opt in" to this project to allow Prosper to sue borrowers on the lenders behalf. I opted in.

02/25/08 -- First suit filed. In Riverside county. Prosper vs Cline
02/26/08 -- Second suit filed. In Orange County. Prosper vs Rozier

Its now 05/06/08 and neither of those two cases has yet had proof of service filed with the court. You can't get very far until you tell the court that you have served the complaint to the defendant!

A great many more cases were filed 04/01/08, and a few more later in April.

So after starting the project on 01/15/08, four months later we only have proof of service for one defendant. That's movin' kinda slow. How many months must we wait to serve the other 65 defendants?

If the very first step takes four months, imagine how long the other steps are gonna take! In what year might we have verdicts? We have to move more aggressively than this.

Second problem is that Prosper is only suing 66 nonpaying borrowers in this project. They think of it as a test. If it goes well, maybe they'll do more someday. Today there are 1187 more Prosper loans that are more than 4 months past due (not counting the 66 in this test). These loans are on a fast track to nowheresville. If Prosper follows its standard procedure, these 1187 loans will be auctioned off for pennies on the dollar. This could happen to the majority of them within days.

Pennies on the dollar ain't good. In a recent note from Doug Fuller to lenders, he told us that the bids he received on the current set of 4+ late loans was about 1/3 the price they've received in earlier auctions. That means $0.03 or $0.04 on the dollar I think. This $0.03 or so is what lenders are going to get for most bad Prosper loans for the foresable future, because the legal test program is tiny tiny tiny, and slow slow slow.

Doing a "test" for a year or so on a small number of loans sounds prudent if its not your money that was lent and is now being washed down the drain. If it is your money, you have a different view. Prosper has simply never taken collections seriously. The lawers need to put some of these cases in high gear. Get them served for heaven sake! Learn what we need to learn in a few cases, and then greatly expand the program. This must be done, because the status quo sucks.

You can't be a successful loan company if you don't try real hard to get borrowers to pay the money back. "Try real hard" doesn't mean "phone calls and one letter". Most of Prosper's management effort is focused on making a better website, or "Are we a Web 2.0 company?" (the title of a real session at Prosper Days '08 ... I kid you not). Get real. You're a loan company. Your success depends on the value of your product.

*** This is not a complete set of names of folks being sued by Prosper. I obtained these names by looking up the suits in public court records in the large counties of California. You may obtain this information, and also status of each case from the county court websites.

Prosper.com - collections is not improving

2008-05-04T00:00:00.000-07:00

Prosper's biggest hangnail is the fact that its loans perform so poorly. One aspect of this is collections. Once a Prosper loan goes 1 month late, the loan is sent to collections, and it almost always defaults. If you can't collect, then Prosper loans aren't worth much.

Collections performance has improved at various times, but it has been stagnant for the last 3 months.

I've graphed a simple ratio. The denominator is the total number of loans Prosper has sent to collections (over all time up to the observation date) and the numerator is the total number of loans which became current after going into collections. I have included only loans sent to Penncro and Amsher, because historically those are the numbers I collected daily from Prosper's web site. I never had much interest in the other collection agencies, because they never were given more than a handful of loans. The color of the curve changes on the day (2/23/08) that Prosper fired Penncro and moved all the in-collections loans to Amsher.

When the curve bends upward, it means that recent performance is better than historical, and is thereby pulling up this all-time average number. When the curve is flat there is no improvement. It is -- most recently -- flat.

I started complaining about Prosper's collections operation back when the numbers were around 6%. That's really a ridiculously low number! Its amazing how much flak I got at the time. Several know-it-all lenders told me that collecting on Prosper loans was inherently impossible. "Can't get blood from a turnip." etc. I never believed that. I believed that Prosper's operations were simply not competent. Over time it became clear that with a lot of pushing from vocal lenders, Prosper did pay more attention and roughly doubled this measure of collections performance during early 2007.

By spring 2008 the curve levelled off again, as Prosper stopped paying attention.

Sometime around mid-September of 2007, Prosper hired Doug Fuller to head operations, which means "taking care of your loans". After Doug arrived, the curve started heading up again. October thru December of 2007 were great months. It looked like Doug was able to make Penncro perform much better than they did before. I called that bend in the curve in Nov'07 the "Doug Fuller bend".

Eventually Doug expressed displeasure with Penncro. As a result, he hired a new company, Amsher, in February 2008. Now from everything I've read about Amsher, they seem like a great company. You should read their web page. Unfortunately, about the time Prosper's collections business moved from Penncro to Amsher, performance sagged. The curve is now once again horizontal. This means that Amsher's performance is around 17.5%, simply matching the all-time historical norm. Stagnation. Bummer. There has been no explanation of this from Prosper.

Doug Fuller occasionally posts a collections status update in the official Prosper blog. These generally have a postive message, like things are improving, and some ad-hoc statistics that you can't verify. For example, in the most recent update, he talked about dollars per loan per month being recovered. For example, we have no idea what loans he counted in that denominator. He described this number as higher than in the past, but depending on which loans he counted, this may not have been a fair comparison between Penncro and Amsher. I think my presentation makes more sense.

Background reading:

Over a year ago I wrote an open letter to Prosper about the collections problem. Some of it is a little dated, but the main ideas are still correct. You can read it here: Open Letter #2

Doug Fuller gave a lengthy talk on Prosper's collections at ProsperDays'08. You can watch it here: PD08 Collections Video

Technical notes: I left this part for the end, because most people aren't interested in the details.

When lenders attempt to understand collections performance, they face several difficulties. Prosper publishes collections statistics, but these statistics are not very helpful when we try to compare two collection agencies. You may have noted that Amsher's "brought current" percentages are all lower than Penncro's numbers were. Why? One reason is that the characteristics of the pile of loans they're working on are different. Penncro got loans that were freshly late, whereas Amsher started with a pile of loans that had been sitting around Penncro for several months. Its not a fair comparison. I've chosen a methodology which avoids this sort of problem.

I've generated a measure which combines the effort of all the players: Prosper, Penncro, Amsher into one number. As described above, the denominator is the count of all loans that have gone to collections, and the numerator is the count of such loans that got fixed. Simple.

Here's how I form the combined statistic.

On 2/22/08 Prosper's collections page showed us that 3348 loans had been sent to Penncro. On 2/23/08 the same page showed us that 1181 loans had arrived at Amsher. 2167 loans "disappeared" from the statistics. I asked Prosper about that, and I learned that only the "live" loans were transferred. Loans that were not actively being collected (either became current, or defaulted) were not transferred. Ok. Whatever. Sorta makes sense, but it makes it more difficult to understand history. I add those 2167 loans back to the number of loans Prosper reports as sent to Amsher. This gives me the total number of loans sent to either Penncro or Amsher, in other words, my denominator.

Forming the numerator is a similar exercise. On 2/22/08, Prosper showed that Penncro had been sent 3348 loans, and that 17.3% of these had been brought current. 17.3% * 3348 = 578 loans brought current by Penncro. From the percentages brought current that Prosper gives us for Amsher I compute the number of loans Amsher has brought current. To this I add the 578 loans brought current by Penncro, giving me total number of loans cured, in other words, my numerator.

I record several of the numbers on the Prosper collection agency web page every day, do the calculations I've described, and draw the curve.

Prosper.com - 4/15/08 late loan stats update

2008-04-17T00:00:00.000-07:00

Here's the mid-April update to to my late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Explanation of methodology can be found in my prior postings in this blog, and in my postings on the old prosper.com forum archive found at http://www.prosperreport.com/

Prosper.com - 4/1/08 late loan stats update

2008-04-05T00:00:00.000-07:00

Here's the April update to to my late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

It does continue to look like there's a change in the quality of loans (for the better) between Oct'07 and Nov'07.

On the other hand, we've been fooled before. Earlier it looked like there was a significant change in behavior between Feb'07 and Mar'07. We thought that Mar'07 and later curves had lower slopes. As things evolved, we now see that was an illusion. Feb'07 was a worse than average month, and Mar'07 was a better than average month, so there was a visual "gap" between these two months. As we now look back on Apr'07, May'07, Jun'07 we see that these curves are very similar in slope to prior months. Loans got a little better early in '07, but the effect was slight.

Explanation of methodology can be found in my prior postings in this blog, and in my postings on the old prosper.com forum archive found at www.prosperreport.com

Prosper.com - late loan stats update

2008-03-09T00:00:00.000-08:00

Here's the 03/01/08 update to my late loan statistics charts.

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Here's a version with the curves slid to a common origin. The horizontal axis is now days since month of loan origination.

Prosper threw us a curve this month. You may recall that a group of loans were partitioned off a few weeks back into a program called "new agency test". Its actually a set of very late loans on which has engaged some lawyers to take legal action against deadbeat borrowers. For techncal legal reasons, prosper bought these loans back from lenders for either $0.00 or something very close to zero (depending on whether lenders opted-in to the program ... a detail that doesn't matter here) prior to initiating legal action. After buying the loans back, prosper changed the state of these loans in their database to "repurchased". I know thi sounds straightforward, but it is not. The "repurchased" state was created early in Prosper's history for an entirely different purpose. At that time, Prosper would occasionally acknowledge that a loan was a result of identity theft, at whcih time Prosper would buy back the loan from lenders at 100% of face value. Prosper argued that by buying back the loan at face value, they restored lenders to a condition as if the loan had never existed. Therefore, they chose to exclude these "repurchased" loans from loan performance statistics. The prosper performance web page, for example treats "repurchased" loans as if they had never originated. I believe thta most 3rd party statistics web sites (ericscc, lendingstats,...) do the same.

Now however, Prosper has used the "repurchased" state for a new and different purpose. Loans that have gone bad, and for which the lender has not been reimbursed, have been put in the "repurchased" state, and eliminated from loan performance statistics. This error makes Prosper's ROI calculations look better than they should, and similarly boosts the lender ROI calculations at ericscc's and lenginstats' web sites. Bummer. This is database pollution.

A note for the conspiracy theorists: I don't think Prosper did this on purpose. I think they were lazy, and didn't think thru the implications of their action. The loan "states" in the database have meaning. Software depends on that meaning, even software written by Prosper itself. If you're gonna use an existing state for a new purpose, make sure you understand the meaning first.

I have carefully adjusted each month's stats in the curves above so that these repurchased loans are counted in both the numerator and denominator of the bad loan ratio. I urge others who use Prosper's data to do the same, at least until Prosper fixes this problem.

Discussion of methodology can be found in earlier posts in this blog, and the late loan thread on the old prosper forum, now found here: http://www.prosperreport.com/prosper/forums/archive/threads/1/1/2/11290.0.HTM

Prosper.com - late loan stats update

2008-02-19T00:00:00.000-08:00

Here's the 02/15/08 update to my late loan statistics charts.

These charts show statistics for the performance of ALL prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have "gone bad", in other words are 1 month late or worse (up to and including default). The horizontal axis is the observation date. All data comes from Prosper.com's performance web page.

A larger, more readable version of that chart can be found here

Prosper.com - collections fluff

2008-02-18T00:00:00.000-08:00

In one of my favorite scenes in The Wizard of Oz, the little dog Toto pulls back a curtain, exposing the fact that the great wizard of Oz is really just an ordinary old guy putting on a show. This teaches kids to question authority, look behind the facade. Good stuff.

Two weeks have gone by since Prosper fired Penncro, and there's no visible action. Is anyone at all collecting on our loans?

On Jan 28, 2008, Prosper announced in email to (some) lenders that the collection agency Penncro wasn't doin' a good enough job. Lenders have of course known this and discussed it openly for over a year, but it was good to hear Prosper finally say it. Lenders were given until Feb 4, 2008 to state their objections.

Well, then a normal person would expect that on the next day, Feb 5th, these loans would be in the hands of the new agency Amsher, and their workers would be dilligently working on our late borrowers. Not so. Two weeks have now passed since Feb 4th, and Prosper's stats still show that no loans have transitioned to Amsher.

What gives?

You can see the data yourself at https://www.prosper.com/secure/account/lender/collection_agency_select.aspx

It shows that Prosper is still sending new loans to Penncro every day, and none to Amsher.

There are many possibilities. One possiblity is that the loans have been moved to the new agency, and Prosper is simply reporting bad data to lenders. If so, they should tell us they're feeding us bad data. Another possibliity is that the loans have not been moved. That would be bad, because Penncro knows they're fired, so I can't imagine they're doing any work on our stuff these days.

What gives?

Time is money.

Prosper.com - collections update

2008-02-15T00:00:00.000-08:00

As I explained last time, Prosper said it would move our late loans from the poor-performing Penncro agency to Amsher. Yet, there seems to be no action. Here's an update on what has happened since I last wrote about this.

02/13/08 - no action. The Amsher numbers are still all zero.

02/14/08 - no action. The Amsher numbers are still all zero.

02/15/08 - no action. The Amsher numbers are still all zero.

Lenders can view the agency numbers at https://www.prosper.com/secure/account/lender/collection_agency_select.aspx

Lenders have no idea where our loans are now, or whether collections activity is ongoing. Is Penncro still making phone calls and taking other collections actions after they were "fired" by Prosper? Is anyone working our late loans?

Prosper.com - slow action in collections, still and forever

2008-02-12T00:00:00.000-08:00

Just about a year after I began speaking up about how poor the Prosper collections agents handled late loans, Prosper announced that they were taking action.

Prosper recently (Jan 28 2008) sent a letter to many (but not all) lenders, explaining that the Penncro agency was essentially being fired for poor performance. Well hot damn ... Its about time. A year late is better than nothing at all.

The letter from Prosper announced that a new agency AmSher would take over existing loans unless lenders objected. I doubt that many lenders objected!

If you wish your existing Notes to remain at PennCro, please send an email to collectionstesting@prosper.com with subject of “Retain PennCro” by Monday, February 4, 2008, otherwise all your existing Notes designated for service by PennCro will be automatically transferred to AmSher and no further action is required.

Ok, so February 4th passed, and then another week has gone by, and according to Prosper's collection agency web page no loans have been moved to AmSher. Why the hell not?

Time is money. Our money is tied up in loans that are rotting, being incompetently serviced by at Penncro. Prosper apparently agrees. New guys have been chosen. Did somebody forget to push the button?

To lenders who have been consistently insulted for the past year by Prosper's promises, inaction, and more recently complete refusal to discuss the subject or allow the subject to be discussed on their forums, this delay is just another insult. One week may not sound like much, but one week delay followed by another one week delay is the way you get to where you are: Two years into the process with no competent collections operation.

Push the damn button already.

Prosper.com - late loan stats update

2008-02-06T00:00:00.000-08:00

Here's the 02/01/08 update to my late loan statistics charts.

A larger, more readable version of that chart can be found here

Nothing much new. Loans continue to go bad at about 20% per year.

Prosper.com - late loan stats update

2008-01-19T00:00:00.000-08:00

Here's the 01/15/08 update to my late loan statistics charts.

A larger, more readable version of that chart can be found here

If we slide the curves so that the horizontal axis represents days since origination month, all the curves fall on top of one another, and we can see how remarkably similar they are. (I've left the oldest three months off of the "slid" chart, because those months do seem to be a bit different.) It will be interesting to learn how much these curves "bend" as we go past 1 year loan age. There is a hint in the data that the default rate may decrease as the loan ages, but it isn't yet clear. I described a mathematical model and showed some curve fits which attempted to estimate how the default rate might be changing over time several months ago on the old Prosper.com forum. I'll update that eventually and post it here as more data becomes available.

If you look out one year from origination (ie 360 days) you will see that about 20% of Prosper's loans have gone bad. You can also see that this is remarkably consistent from month to month (ie the different curves). One can only conclude that the default rate of Prosper loans is in the neighborhood of 20% per year. Loans originating after Feb'07 are going bad at a slightly lower rate, probably because Prosper increased the minimum credit score required for a Prosper loan at that time.

Shamefully, Prosper continues to report much lower default rate numbers to the press. See a recent example in the Chicago Tribune article of 01/13/07, which talks of a 4.7% default rate. http://www.chicagotribune.com/business/yourmoney/chi-ym-started-0113jan13,1,842983.story?ctrack=1&cset=true

Prosper.com - Collections Update

2007-12-30T00:00:00.000-08:00

Prosper.com hired Doug Fuller to lead "operations" some time around mid September. He's been there 90 days, so we're gonna take a look at how one of Prosper's biggest problems - collections - is doing under Doug's rule. Summary: Improving, but slowly.

You might think its strange to discuss an individual employee. A bit of history may make that more understandable. In the beginning, Prosper thought of themselves as the E-bay of loans. They built an incredible web-based infrastructure to match lenders with borrowers and process payments. Unfortunately, they didn't think enough about the loan business. Not enough attention was paid to loan "operations", identity verification, fraud checks, ensuring valid contact information, handling various payment situations, customer service, and collection of late payments. Prosper may look like E-bay on the outside, but inside a lot of machinery is needed to make the loan business work. They got off to a bad start with that machinery, and how quickly they recover may well determine the future of Prosper.

Example: a year ago, when I first started writing about these problems, the cure rate (the fraction of loans that recovered after going 1 month late) was only 7%. In other words, once a loan went late, you could pretty much write it off. And about 20% of prosper loans per year went 1 month late. The resulting huge default rate discouraged many early lenders, and threatened the future of Prosper and P2P lending. In addition, many lenders were angered by how slowly Prosper took visible steps to fix these problems.

Operations is important. Its the core of the business.

So it was an important event when Prosper two years after it started Prosper openly recognized the importance of loan operations by hiring a VP of Operations, Doug Fuller.

When Doug arrived, he promised a hard line on collections. Its been 90 days. Lender's money is at stake. How's he doin'?

Lets look at the history of Prosper's cure rate, that is the fraction of 1-month-late loans that are eventually broght current. (The rest of them go on to default.)

Good news: getting better all the time. Bad news: Not good enough yet.

As often occurs, there are some technical problems with interpretation of this data. The statistic I'm plotting above is the fraction of all loans (over the entire history of Prosper) that have cured while at the collection agency Penncro. In other words, an average over all time. This statistic is weighted down by a lot of old loans that have already defaulted or nearly so. I'd really like to have data showing collections performance on recent loans. Because this average moves up with time, we know that performance on recent loans must be significantly better than the average. But how much better?

Looking at the chart, you'll note that it looks like there's a little "bend" in the curve two months ago around the end of October. Doug Fuller arrived around mid-September, so I'm gonna call the end of October change the "Doug Fuller bend". I don't know that this change came from his efforts, but is seems a resonable possibliity. Things are better, but how much better? ...and what changes has Doug made to cause this improvement?

Besides this "lifetime" statistic, Prosper also provides a "last 3 months" statistic. At first I thought great, that's the thing I should use. The first thing I noticed was that the "last 3 months" numbers are lower than the "lfetime" stats. We know that recent collections performance is better than in the past, so this didn't make sense. I contacted Prosper for clarification. They told me that "last 3 months" doesn't mean loans that have entered the collections process within the last 3 months, as I had presumed. It means all loans that were in work at Penncro at any time during the last 3 months. Suddenly it became obvious why the "last 3 months" numbers are low. They are weighted down by all the bad loans that are stuck in collections, sitting around Penncro, 4 months, 5 months, 6 months, 7 months, etc late just waiting to be sold off. Its a roach motel statistic! That's too difficult to interpret. At least the "lifetime" statistic is unbiased. It contains every loan that has gone to collections exactly once, so the relative weightings of good and bad loans is exactly the relative weighting of same that arrived at collections.

I returned to the "lifetime" statistics. But I really wanted to get a quantitative measure of what fraction of recent loans are getting cured. Starting 10/30/07, in addition to copying the % cured from Prosper's web page each day, I also copied the # of loans in collections. Now that I have this data for 2 months, I can calculate the number of loans that were added to collections during this period and the number of loans that recovered. If I assume that all the loans that recovered were loans that were sent to collections during this period, I can calculate the cure rate that would be required to produce the numbers Prosper gives us. I'll spare you the equations. The number comes out 23.6% .

Now that number is almost surely on the high side, as it presumes that all loans recently cured were recently sent to collections. There were almost surely a few old ones that cured as well. Now we have bounds. The cure rate on recently-gone-late loans is between 15.65% and 23.6%. Its probably around 20%. That's a lot better, but it still means that about 80% of loans that go 1 month late will go on to default. That's still not very good.

We don't know what actions caused these improvments in collections performance. Several times Prosper employees have told me that low contact rates were a big problem. In other words, when the collection agency tried to contact the borrower, a large fraction of the time they would find that the phone numbers and addresses didn't work. Scary. We know that Prosper implemented phone checks and address verification post cards to help with this problem. We don't really know much, because they've been tight-lipped about both their understanding of the problems and ongoing improvements.

Seems to me that if address verification post cards helped, then fraud of some sort was a big problem, because it seems to me that this is the only problem an address verification card can fix. After all, Prosper already used Experian's database to check addresses given by borrowers. If the address matches the name in Experian's database, but the postcard fails, then the name and address matched, but the actual borrower doesn't live there. That's fraud, yet Prosper denies that identiy fraud has been significant. Curious. We just don't know, because Prosper hasn't shared with us any details of the ongoing battle against fraud, or even against nonfraudulent bad addresses and phone numbers.

In a traditional loan company it makes sense to keep this sort of info private, but Prosper isn't a traditional loan company. Because of the poor performance of Prosper's loans, there's a crisis of confidence. To fix that one would need to be more open, but Prosper's relationship with lenders has becme much less open during the last few months. In some cases Prosper has become downright hostile.

I tried to communicate with Doug Fuller once. Sent him an email message. I got back a response from Prosper's Shira Levine, saying that Doug had received my message. I have never had that happen anywhere before. I haven't tried to talk with him since. (If you've had better luck, let me know.)

Prosper began with an incredible philosophy of openness. Who else ever made public the incredible amount of information about loans that Prosper does? Nobody. Somehow things took a turn. It will be impossible to restore lender confidence without openness. That's my advice.

Doug Fuller did say in his 10/2/07 "interview" that there was a "40% increase" in contact rates during September 07. Doug Fuller Interview He said this improvement came from getting Penncro to start their autodialer at different times of day. How could the prior management of collections be so dumb as to dial at the same time every day? Its not like they didn't know collections was an important issue. We told 'em so, and they said they agreed.

In the early days of Prosper, lenders used to debate the causes of the high default rate and low collections cure rate. Some felt that there were just a lot of bad loans, either due to fraud or lender stupidity. Others believed that the collections effort was inept. Maybe it was (or is) all of the above. How are these things changing? How can we regain our confidence if we don't know?

My apologies. This discussion has run downhill. I started with numbers and have descended to speculation about tidbits that have escaped from the perimeter of the castle. To some this speculation may seem rude, but remember these are our loans. The lenders own them. Prosper merely originates and services them for our benefit.

Summary:

Collections is indeed improving, but very slowly
The drawbridge is up; little information about collections is being shared
Doug Fuller might be improving things if the little bend is for real
Wish he were more open

Lendingclub - Reconsiders the Bad Math

2007-12-28T00:00:00.000-08:00

A message from Patrick Gannon of Lendingclub ...

Date: 12/24/2007
From: Patrick Gannon ...
Subj: Re: Lendingclub - bad math
Thank you for your analysis of our ROI calculations. We are taking down the ROI section of the statistics page for now while we review your comments, track down potential errors in the calculation and improve the help page. We will blog a response in the next few days after we relaunch that page.

I tried to open an account on your blog to post a public comment but couldn’t sign up.

We appreciate your interest in Lending Club, and we hope that we can win you over as a lender.

Thanks again for your analysis,

Patrick from Lending Club

Thought I'd post this, both to make their response public, and also to unpuzzle anyone who went looking for the page I was complaing about and did not find it.

I do hope they succeed. Prosper needs a competitor .

Lendingclub - Bad Math

2007-12-23T00:00:00.000-08:00

Lendingclub now provides an estimated "Lender ROI" calculation on their web site. Unfortunately, their mathemematics is incompetent, and the resulting numbers are meaningless.

You might say "Gee, why is he so hard on them?" The answer is simple. They want my money. This forces me to set a standard.

I guess us P2P lenders are spoiled because Prosper.com got much of this right. It looks like LendingClub tried to copy the presentation on the Prosper performance web page without understanding the calculation.

Lendingstats performance statistics can be found at http://www.lendingclub.com/info/statistics.action#

Here's a picture of their ROI chart...

The page containing this table comes with a popup help page that explains the calculation. Lets try to use it to understand what they have done. Sorry if this is a long slog. There's no other way to show you how utterly bogus this is.

Estimated Lenders ROI table
Average rate: The average interest rate for all loans that have closed within the loan grade (A-G)
Losses: The sum of the principal amount of the loans that are expected to default, expressed as a percentage of lenders estimated ROI. A loan is "expected to default" for purposes of this estimated ROI calculation (i) at a 50% clip with respect to loans that are at least 15 days late and (ii) at a 90% clip for loans that are at least 120 days late
Processing Fee: Fee paid by the lenders expressed as a percentage of lenders estimated ROI
Estimated ROI: The net estimated return on investment after subtracting estimated losses and fees

Average rate makes sense.

But when we come to "losses" ... Whoa. "sum of principal amount of the loans" ... That I understand. When they say "that are expected to default" they mean late loans multiplied by a factor, 50% or 90%. That I understand. They go on "expressed as a percentage of lenders estimated ROI." I stared at that for quite some time trying to figure out what the heck they could be doing. You see, we're building up to the ROI calculation. These losses are one component of it. We don't know the ROI yet, so we can't possibly divide by it. This is just wrong.

I reverse engineered the numbers in the table. What they actually have done is to add up all the estimated losses (dollars) and then divide by the total principal amount of the loans in that credit grade. So the guy who wrote the explanation didn't understand the thing he was trying to explain. Ok. The losses numbers they actually calculated are closer to being right, but are not right, for two reasons.

First, they are not properly normalized. Second, they include only the loss in principal. They forgot the interest which is lost when a loan defaults. I'll spend a few sentences explaining each of these errors a bit later, so you can understand how big these problems are. For now lets continue reading the help popup.

The processing fee explanation in the help popup is also wrong. The words "expressed as a percentage of lenders estimated ROI" simply don't belong there. After computing these various percentages, they subtract them, which means they had better all be percentages of the same thing: principal.

It isn't easy to describe a calculation precisly in english. Equations are better. So it seemed good that LendingClub's popup went on to provide equations. However, these equations are all wrong. (And by all, I mean each one of them is wrong.)

Estimated ROI = Average Interest Rate - (Loss due to Late Loans - Loss due to Default Loans) - Lending Club Processing Fee
Where:
Loss due to Late Loans = Sum (50% * (unpaid percentage) * (interest rate of the late loan))
Loss due to Default Loans = Sum (90% * (unpaid percentage) * (interest rate of the default loan))
Lending Club Processing Fee = 1% of all payments received by lenders.

Ok. Lets start at the top. The equation for Estimated ROI says we should subtract some numbers. I expected that. But look at that minus sign inside the parenthesis. This equation would have us subtract one kind of loss but then add (instead of subtract) another kind of loss. That's wrong. Either the minus sign inside the parens should be a plus, or the parens should be dropped.

Next lets look at the equations for losses. They're similar, so lets just look at the first one. It has us sum some things. We'll assume we're summing over the late loans. Lets look at what's inside the sum.

50% * unpaid percentage * interest rate of the late loan

There are many things wrong with this. First, they don't say percentage of what. Second, the numbers shown in the table are clearly the fraction of principal that is late, which has nothing to do with "interest rate of the late loan". I think what they meant to say was

sum(50%* late principal) / total principal

Finally, there's an equation for processing fee. Well, its not quite an equation. It is the definition of the LendingClub processing fee. Unfortunately, its in units of dollars. 1% of some dollars is going to be some other amount of dollars. The number in the table on the other hand is a percentage rather than dollars, so this equation can't represent what is in the table. Some calculation was done to get from dollars to percent. Not specified. Another problem is that they haven't told us how the dollar amount was calculated. Did they calculate the payments due during a year for each loan, multiply by 1% and then sum? The numbers in the table look too large for that. What they actually calculated is unknown. A proper equation would leave us with none of those questions.

Enough with this unhelpful help file. Lets go back to the two big errors in the actual calculation. These are: 1. the loss rate is not properly normalized. 2. They counted only principal and forgot lost interest.

To understand the normalization problem, we have to look at the units of the numbers in the table. The first line contains the average interest rate of the portfolio. That interest rate is a rate per year. The second line contains the loss rate, which they have forgotten to convert into a per year rate. They're going to subtract these two numbers, but they aren't in the same units!

To understand why this is important, imagine that you borrow some money from me at 3% per month, and lend it to Joe at 5% per year. Now you subtract 3% from 5% and think you are getting a return of 2%. Not so. You subtracted two numbers in different units. To do the calculation correctly, you would convert the 3% per month interest rate into an annual rate and then after you have two numbers in the same units you would subtract them. You would discover that you're losing a lot of money.

That "losses" rate in Lendingclub's table is not a per year rate. It shows loans that have gone bad (late or default) during their life so far. The Lendingclub portfolio is very young. "So far" has not been much time. To convert that number to an annual rate we're going to have to increase it a lot.

I downloaded the Lendingclub database, and calculated the average age of the entire Lendingclub portfolio. The loans in the portfolio are 84 days old on average. A lot less than a year! But that's not the entire story. Loans can't possibly go bad during their first 30 days, because no payment has yet become due. At the very least, we should subtract 30 days. But there's more. Lendingclub uses "15 days late" as the threshold where a loan becomes "bad" for the purposes of our loss calculation. This event cannot occur until a loan is 45 days old. Wow. So we should really subtract 45 days from the 84 day average loan age. You get 39 days, and that's just 0.11 of a year! To normalize the "losses" that Lendingclub shows in their table, we should divide them by 0.11, which is the same as multiplying them by approximately 9. Ouch.

Look at the column for loans of grade "B". The 0.51% losses they show, when properly normalized (annualized) becomes 4.64% per year losses. Quite a difference.

I should mention that this simple normalization method makes several assumptions about the behavior of loans. It is certainly not the only way the normalization can be done. I'd be open to Lendingclub using some other method, as long as they tell us what they've done and it makes sense. Just using 39 days worth of losses to represent a years losses is not acceptable.

The second error in this calculation is more subtle. When a loan defaults. Everybody realizes that you lose principal. You also lose the interest that you expected to get. I can hear people saying "but you didn't get it yet so how could you lose it?" Lets look at a simple example. Suppose I lend you $1 at 5% interest, and to keep this simple you're gonna pay me back in 1 year. My return will be 5% if you pay me back, or -100% if you don't. The difference between those two numbers is 105%. Using the kind of ROI formula that Lendingclub used on their stats page, I would start with the 5% interest rate I expected to receive (that's the "average rate" on the first line of their table), then I would subtract something called "losses", and I want the answer to come out to be my ROI. If I want to come out with an ROI of -100%, I'm going to have to show -105% on the losses line because that's what I need to subtract from 5% to get -100%. That -105% represents loss of both principal and interest.

If you look closely at Prosper's performance table, you will see two losses lines, labelled "net defaults" (which is where they put the estimated principal loss) and "adjustment (interest and fees)" where they put the estimated interest loss.

Lendingclub left out the 2nd line.

In the early days of Prosper.com, they got this one wrong too. They used to explain that all you needed to do was add the ROI you wanted to obtain to the default rate you expected on a certain grade of loan, and that sum was the interest rate you should bid. That calculation ignores the lost interest term. This wrong calculation for a long time was coded into the Prosper.com standing orders web page.

Having trashed their attempt at performance calculation, I don't want to end without saying a few things about some positives at Lendingclub. The principals seem like nice chaps. They seem very open to communication with the lender community. That's a great big positive. Like Prosper, they've also decided to make their loan database available. This is also a great positive. (Its not as extensive as Prosper. They only have loans, no bids or info about lenders. It turns out that in Prosper's data, the information about lenders' behavior and performance is the most useful part.)

I imagine the fine folks at Lendingclub will straigthen all this out. Once they do that, and their portfolio ages enough to be measurable, I'll be very interested to see how the returns numbers look. Before I invest in loans, I need some way to know (or believe, or have a hunch...) that the interest rates on the loans are reasonable. Investing thru Prosper.com, many of us learned that the historical default rates prosper used to give us from Experian were inapplicable. Prosper's default rates turned out to be much higher. I would assume its going to be the same way on Lendingclub. Lendingclub started by giving investors a set of historical default rates from Transunion. It seems likely to me that these will end up being inapplicable to the Lendingclub situation. We need good data from Lendingclub's own operation before we can decide whether these investments make sense.

The folks running Lendingclub set the interest rates for us. To do that properly they need to understand the mathematics of loans. I need to have confidence in their ability to do that math correctly. I'm not there.

My Holiday Wish for Prosper.com

2007-12-21T00:00:00.000-08:00

If I could wish for just one thing this holiday season when it comes to Prosper.com it would be redacting any changes that lead to the appearance of censorship.
It is my opinion that the appearance of censorship on the part of Prosper.com and its management will be the downfall of Prosper. PMI needs to remember that this is a place where lenders invest their hard earned dollars and where borrowers ask for same. Everything that is done needs to be above board and honest to a fault. This appearance of censorship started when Prosper erased, completely erased, the old forums and installed a new one.
I have kept track and nine out of my last ten posts to the new forums did not meet approval and were not posted. Add to that that Prosper is sending out letters from attorneys to various members, banning anyone who mentions an outside website on Prosper.com, and erasing profiles that do the same and it looks like Prosper operates under a police state.
I want nothing more than for Prosper to succeed and it is my most fervent wish that I can work within Prosper to affect change.
As it stands now until or unless Prosper takes some action to remember who their customers are I won't be borrowing or lending again. That's a sad statement for me to make and I hope Prosper realizes I'm not the only one who feels this way. Many of us feel that Prosper has squandered not only the goodwill we once had but also the tremendous talents of their lender and borrower base are the customers who have been with them since the beginning. We all share one common goal: to see Prosper succeed and become the premier site for P2P lending. We hope Prosper shares this goal with us.

The words above were written by long-time Prosper member Cushie06. She submitted them to the official Prosper.com blog, where they met the following response:

Unfortunately Prosper is not able to accept your post for to the Prosper Blog. Many of the sentiments expressed are shared, but we fell it is inappropriate for the blog..

Thanks Cushie.

Prosper.com - late loan statistics update

2007-12-16T00:00:00.000-08:00

Here's my 12/15/07 update to the prosper.com late loan statistics, with some notes on default rates. You've heard me say it before. The default rate of prosper.com loans is repeatedly misrepresented in the press. This trend continues.

First, today's chart...

A larger more readable version of the chart is available here

An article about Prosper.com appeared on Yahoo today. It contains a misleading statement which has appeared in many articles about prosper. "The default rate on Prosper loans is a meager three percent." http://news.yahoo.com/s/afp/20071216/bs_afp/lifestyleusbritaininternetfinancemoney_071216024815

Too bad the author, Glenn Chapman didn't do a little research. Seems likely that he just copied from the last misleading article, the November 27, 2007 Associated Press article http://www.msnbc.msn.com/id/21993720/

Its pretty easy to see that the default rate on Prosper.com loans is about 20%/year. You can see it in the chart above. Doing an estimate using all the loans on Prosper requires some tricky math because loans are of various ages. That is difficult to explain. To make this simple, lets look at a group of loans that are all almost exactly 1 year old. That way there's no age adjustment to do. We're just gonna estimate how bad things got during that first year. I've written about this before. This time I'm gonna talk numbers instead of theory.

Lets look at all the loans that Prosper.com originated in October 2006. I'm going to consider, as I do in the chart above all those loans that have gone at least 1 month delinquent. The information about such delinquency comes to us with a built-in 2 month delay. In other words, a loan's first payment isn't due until the loan is 1 month old, and that payment can't possibly be 1 month late until a 2nd month has gone by. That's why the curves jump up from zero at 2 months after origination. With that in mind, I chose Oct'06 loans, because they're just now at the point where we have observed 12 months during which it was possible to be 1 month late.

Luckily, Prosper makes all the numbers available via their performance web page. This is a good thing! Now according to Prosper, 740 loans originated in Oct '06. Of those, 81 loans have already defaulted. If we counted only loans that have already gone all the way to default, we would divide 81 by 740, giving us 10.98% of these loans defaulted in the first year.

However, we know a bit more. In Prosper's vernacular, "default" actually means that they have already disposed o the bad loan. There are a great many loans that have gone more than 4 months late, Prosper's criteria for default, but have not yet been sold to junk dealers. These loans are just as bad, but haven't yet been given the name. While it is theoretically possible for one of them to recover, we know 99% will default. In fact, this will happen within the next few days, as Prosper has scheduled a loan sale before the end of the year. Prosper tells us there are 73 of the Oct'06 loans i nthe "4+ late" category. If we add those in, we get (81+73)/740 = 20.81% of Oct'06 loans are defaulting in the 1st year. Wow. That's a lot different than the 3% mentioned in the article, isn't it?

A better estimate can be made by using more of the late data. Based on historical performance, we know that once a Prosper.com loan goes 1 month late, it almost always defaults. It is legitimate to count these as associated with the loan's first year, because there is such a high probability that the "stop paying" event has already occurred. Prosper tells us that of the Oct'06 loans, 13 are 3 months late, 12 are 2 months late, and 16 are 1 month late. Therefore the total number of loans that are 1 month late or worse is 81+72+13+12+16 = 195. Each of these 195 loans was sent to Prosper's collection agency when the loan was 1 month late. We know from the collection agency statistics that Prosper also publishes that about 15% of loans that have gone to the agency have recovered. We can therefore estimate that about 85% of such loans will default. That gives us a way to estimate from loans that have already gone late, how many will default. That estimate is 85% x (81+72+13+12+16) = 165.75 . Finally, if we divide this by the total number of loans, 740, we get 22.4% . Stop pay events in the first year of these loans will cause 22.4% of them to default.

If you look at the chart above, you will see that there's nothing very special about Oct'06. The curves for most other months have the same slope and general shape.

Prosper loans, so far, have been defaulting at about 20%/year, not 3% as the article claims.

This number is important for Prosper lenders to know. The simplest takeaway is this: If you want your portfolio to have a default rate better than 20%, you'd better be selective!

There are many other things I've learned from these curves. Example: I used to see people say things like "After a borrower makes 4 or 5 payments, I think the loan will be ok." Turns out, that's nonsense. If you look at the curves, you see that nonpayment events are well spread out over time. We know so far that they're pretty uniform over the first 18 months or so of the loan, and may well continue thruought the life of the loan. (ie the curves are pretty straight) Nothing magic happens after a few good months. That was a lender's fantasy.

In the last update of the charts, I noted that the Aug'07 curve took a big jump. I wondered whether this was a data glitch. Now confirmed. It was a glitch. A few days later, Prosper revised the numbers. The Aug'07 curve looks perfectly ordinary now.

Wall of Sham returns!

2007-12-09T00:00:00.000-08:00

I just wanted to mention that one of the best Prosper-related web sites has returned from the dead. www.wallofsham.com This ingenious site profiles Prosper deadbeats - borrowers who have defaulted on Prosper loans. The stories of these individuals are real eye-openers, and sometimes just hilarious. If you want to be a successful lender, it helps to understand the deadbeat.

The site temporarily suffers from a few dead links, due to Prosper's recent removal of 2 years of forum content. Don't let that bother you. Much is still intact.

Note added 05/2008: Wall of Sham is again offline. It is sad to see how people fear deadbeats and the laws that protect them.

Prosper.com - late loan statistics

2007-12-02T00:00:00.000-08:00

Prosper no longer allows me to publish this material in the prosper.com discussion forum, so I will now publish it here on prospers.org .

Here's the 12/01/2007 update of the late loan chart.

A larger version of this graph is available: here

The following chart presents the same data, except that the curves have been slid to a common starting point. The horizontal axis now shows days since loan origination month. The first three months Mar'06, Apr'06, May'06 have been left off of this chart, because the curves for those months (Prosper's early days) have a different shape. With those curves left out you can easily see how similar the remaining curves are.

Look about 1 year out. You see about 20% of the loans have gone bad at that point. Individual months vary, but are quite similar.

Notes on methodology:
Each curve contains data on all the loans that originated in a particular month, as identified in the legend. All data comes from Prosper's performance web page. Data points are computed from data observed the 1st and 15th of each month.

Each data point is a ratio. The numerator is the number of loans that have 1 month late or worse. The denominator is the number of loans originated. Thus this ratio is the fraction of loans that have "gone bad".

More specifically, the numberator is the sum of loans in the following states: defaulted + "1-3 months late" + "4+ months late" + repurchased. The first three numbers are read directly from Prosper's performance web page. Prosper does not explicitly display the number of loans repurchased. I calculate the # loans repurchased by tracking changes in the number prosper shows as "loans originated".

The denominator is the number of loans originally shown by prosper as having originated in the designated month. When prosper repurchases a loan found to have been fraudulent, they "unoriginate" the loan, in other words they subsequently show that a lower number of loans have originated. I use the original (higher) number in the denominator of my ratio. For example, in May of 2006, 458 loans originated, although they now show the number of originations as 446, after having repurchased 12 fraudulent loans.

Excluding the early few months of Prosper, these curves look very similar to one another. Separating loans by age allows us to see the time evolution of delinquency. Delinquency grows over time. We can also see the rate at which it grows. For the first year each group of loans shown here has gone bad at more than 20% per year. Because almost all Prosper loans that go more than 1 month late go on to default, we can also see that the default rate on the all-prosper portfolio is approximately 20%/year.

Given that this is so clear from Prosper's own data, it is sad to see the quality of Prosper loans misrepresented in the press over and over. The most recent example is a November 27, 2007 Associated Press article http://www.msnbc.msn.com/id/21993720/ wherein Chris Larsen is quoted as saying:

Prosper’s default rate hovers at about 2.7 percent, Larsen said, but that figure is expected to rise as more loans mature.

Its not difficult to figure out how he comes up with 2.7%. If you take the total $ worth of loans that prosper has declared defaulted so far, and divide it by the total $ worth of loans that Prosper has originated so far, you get approximately 2.7%.

That ratio, however, is not meaningful to lenders.

One problem with the 2.7% number is found in the choice of numerator. The numerator in this fraction includes only loans that have been declared "default" by Prosper. Prosper ages highly delinquent loans quite some time before declaring them "default". Loans are subject to default at 4 months late, but Prosper holds such loans until a quarterly disposal, and only declares them default once they have passed the quarterly event. Loans >4 months late would be in the default state except for the fact that they are waiting for the quarterly auction. Today Prosper shows $2,864,899 of loans in the "default" state, and $3,694,261 in the "4+ months late" state. More loans are in this suspended waiting-for-the-auction state than have so far completed the process and been declared "default"! If the quarterly auction had been held yesterday, the calculation of Larsen's ratio would have come out 6.4% instead of 2.7%.

The denominator is also a bad choice. Itcontains many loans so young that they could not possibly have defaulted yet. (Loans must be 5 months old before they can default.) The denominator also contains many loans old enough to default, but still low on the curve. This methodology is simply defective.

Only when lenders understand the rate at which Prosper loans go bad will they have a chance to understand how selective they must be to succeed. Prosper loans have been going bad on average at about 20% per year.

There was one small surprise in this update. The Aug'07 curve took a jump. This occured because the # of originated loans in Aug'07 dropped. Was 979 originally, and was still 979 at my 11/15/07 reading. As of 12/01/07 Prosper shows only 940 loans originated. This (probably) means that some time during the last two weeks Prosper repurchased 39 loans from Aug'07. Must have discovered a big batch of fraudulent loans. If this theory is correct, it would be the largest batch of fraudulent loans ever detected. Haven't heard anything about this event, but then it seems like it may have occurred at about the same time the Prosper forums were shut down, and there has been less sharing of information in the Prosper community since that time. We should soon hear confirming information from lenders who were part of this repurchase, or else learn that it was a data glitch.

Prosper.com - Doug Fuller's 60 Day Review

2007-11-24T00:00:00.000-08:00

A little over 2 months ago, Prosper presented their new VP of Operations, Doug Fuller. He promised serious improvement in Prosper's disasterous collections department. Now that he's been on the job two months, it seems like time for a status check. How's Doug doin'?

Lets look at Prosper's collection statistics for the time since Doug's arrival.

As you can see from the chart, Prosper's statistic for late loans cured has increased by about 1% in the time since Doug joined.

How should we think about that improvement? Remember that in February '07, Prosper increased the lower cuttoff credit score for new borrowers, Because of that change the average quality of borrowers since that time is substantially improved. This change alone should cause the cure rate of late loans to increase slowly over time without any change in collection effort. Indeed, the cure rate has increased gradually since that time. The 1% improvement in the last 2 months is likely due to that effect alone.

What if the 1% improvement is due to Doug's effort. Is that a good result? Suppose he continues on this half-a-percent-per-month slope. It will take two years to get to 26% .

What about the "new agency test?" Dunno. Prosper has decided not to share the data. The only evidence of the test is a cryptic note on a few dozen loans. Dunno 'bout you, but none of my loans with the cryptica "new agency test" note have been cured. If there were great positive results, I'd expect Prosper would have shared them. I'd recommend sharing the results in any case, as the lenders are after all the owners of the loans.

So far Doug is just another disappointment. Hope he produces better results during the month of December. Nothing would make me happier. But frankly I believe structural changes are needed. As long as lenders lose thousands, and the collection agency only loses the opportunity to make a few bucks, the right things aren't gonna happen .

See my writeup from May 2007: Open letter #2 to Prosper.com

Prosper.com - Oops... (they) did It again!

2007-11-06T00:00:00.000-08:00

Oops.

I've been critical of some of Prosper's misleading advertisements and newsletters in the past. Last time I caught them making incorrect statements in the newsletter, a Prosper spokesman wrote "Going forward with the newsletter, we will diligently fact-check each story before publication." Ok. Great in fact.

They just published their November newsletters. So how did they do this time? If you'll pardon the slightly mangled and heavily overused words of Britney Spears, the title says it all. How can this be?

The November lenders' newsletter contains the "stories" of two lenders. I'll look briefly at each one.

In one story, lender hcjack2208 writes

Right now I have 30 loans that I have invested in.
Even with a few defaulted loans, I am still making a 13% rate of return on my money.

Wow. This dude is making 13%! Cool.

Thanks to Prosper's data export, we can look at the status of hcjack2208's loans. The lendingstats.com web site makes it easy for us. We learn that he has 42 loans and 7 of these are late. A pretty substantial fraction of lates. If we estimate his rate of return with the assumption that loans in his portfolio will go bad in the future at the same rate they have in the past (the assumption that lendingstats ROI calculation makes), then hcjack2208 is achieving a rate of return of 4.6%, not 13%. Big difference, eh? Oops.

You can view the details of hcjack2208's portfolio here.

Next there's a story about lender davesax. Davesax writes

At this point I've got $23,000 invested in 200 loans with a gross yield of 14.25% (less 1/2 point for Prosper) and only a few late pays, but none over 15 days at present.

Wow. 200 loans and nothing over 15 days late. This gives the impression that davesax's return will be something close to that gross yield of 14.25% that he quotes. That really sounded great, so figured I should look at his portfolio.

Davesax now has 360 loans, of which 13 are late. 1 loan is 4+ months late. 3 are 3 months late. 2 are 2 months late. 3 are 1 month late. 4 are >15 days late. The facts don't match the statement in the newsletter at all. Well, that's misleading.

If you want to do the davesax rate of return calculation in your head, note that those 13 late loans are about 3.5% of his portfolio. Because his portfolio is less than 6 months late, you've got to more than double that to get an annual default rate. You end up with something around 7%/year estimated defaults. He started with a little over 14% gross interest rate, so you would expect his return to be something a little less than 7%/year. I won't bore you with the numerical details. Lendingstats does a much more careful calculation, applying appropriate roll rates and loss rates.

The lendingstats ROI esimate for davesax comes out 6.29% .

You can view the details of davesax's portfolio here.

The sin in the above examples is that Prosper took quotes from relatively new lenders, then used them more than 4 months later. New lenders often think they are doing better than they really are, because they don't project losses appropriately.

Most lenders don't have the mathematical sophistication to compute how well they're doin'. That's why the portfolio calculations at lendingstats are so very useful. Prosper itself offers a similar calculation, on their "performance" web page, but they don't let you apply the calculation to your portfolio. You can only apply the calculation to various subsets of the whole-prosper portfolio, based on a list of filter criteria (date, credit grade, etc). I believe it is terribly important to make lenders understand their own performance. To do anything less is misleading.

Toward that end, I have suggested that Prosper adjust their "performance" web page so that it will compute the ROI of a lender's portfolio. In the meantime, lenders can use lendingstats.

Google

Google advertisements being run by Prosper recently deliver those who click to a landing page that contains the following graphic:

Unfortunately, the word "average" is pretty well defined, and the average portfolio on Prosper is not earning 9.4% as the ad implies. The mean lender portfolio ROI is 4.39%. (again using the excellent Lendingstats calculations) You can read a discussion of the distribution of Prosper portfolio returns here.

The 9.4% number is obtained by filtering for a small subset of Prosper loans, as explained in a footnote. Showing the results of a cherry-picked set and calling it "average" is well...

I think the ad is misleading. Regulators came down hard on the securities industry for this sort of shenanigans in the 60's and 70's. Now there are quite well defined rules for how one calculates the return of a mutual fund, or an investment manager. The SEC created uniform rules for how mutual funds would present their performance. An industry self-reguating group known as CFA (formerly known as AIMR) created detailed rules describing how investment managers should report their performance. (One of the rules says you don't cherry-pick.)

Prosper believes it is outside of such rules and regulations. This is true only because Prosper's product is new and different, and the regulators aren't engaged. I don't even know what regulator has oversight of the prosper & lender relationship. The regulators don't know yet either. Meanwhile, the best course of action for Prosper would be to very carefully avoid misleading people.

Some good news

Prosper has made some positive changes lately. Until recently, Prosper presented lenders with a set of default rate statistics provided by Experian. These statistics guided lenders by giving them default rate estimates for borrowers in each of the Prosper credit grades. Unfortunately, as long as a year ago we could see that the default rates of Prosper borrowers were running several times higher than the Experian-provided statistics, but Prosper continued to present these misleading numbers to lenders. In a recent upgrade, Prosper did away with the bogus Experian numbers and replaced them with stats derived from historical Prosper loans.

Bravo. One great big misleading thing has been removed.

But the newsletter... still misleading.

Prosper.com - Collections Still Wanting

2007-10-14T00:00:00.000-07:00

I've been charting Prosper's collections statistics ever since Prosper first made them avaiable. Prosper sends loans to a collection agency when they are 1 month late, and the outcome after the collection agency's efforts are charted below.

The big picture is that Prosper's collection results continue to be scandalously bad. Of those loans that go 1 month late, Prosper's data shows that 13.5% of the loans are cured, from which we can estimate that a horrible 86.5% go on to default. (We are forced to estimate, because these stats include loans still in process. However, as you can see from the breakdown, almost nothing is ever collected after the first month, so the estimate is pretty close.) Here's the data for Penncro, the collection agency handling most of Prosper's loans...

Notes:

The data for this chart comes from Prosper's Collection Agency Web Page. I have shown data only for Penncro. Although Prosper has two collection agencies, almost all late loans have gone to Penncro. The other agency, FirstSource, is doing even worse.

I've hidden the red "net collected" curve prior to 7/4/07, because the data prosper provided for that period was obviously wrong. Older versions of this chart and related discussions can be found in the collections thread on the prosper forum.

A more complete discussion of Prosper's collections can be found in my blog entry from May, "Open letter #2 - Collections is broken".

A couple of weeks ago, Shira Levine published an interview with Doug Fuller, the new fellow in charge of Prosper collections. At one point, Doug was talking about his success improving collections at a prior job, and Shira asked...

Q: Can you do the same thing with Prosper’s collections calls?
A: Actually, for the month of September, we’ve seen greater than a 40% increase in the contact rates at our primary collection agency

Wow! 40% improvement! Sounds great, but looking at the collections rates in the chart, I don't see a corresponding improvement in September. How can it be that a 40% improvement in contact rates produces no results in collections?

One way this could happen is if the contact rates were so small to begin with that a 40% increase is insignificant. Prosper has never published "contact rates", so we don't know how big a 40% increase is. If you were only contacting 5 people before, and you added 2, that would be a 40% increase, but the additional 2 contacts wouldn't affect the overal status of the 1148 loans in collections by much.

To Doug's credit, he has been the first Prosper employee to state publicly that collections has been mismanaged. That's a start. Now lets see some action.

Prosper.com - responds

2007-09-26T12:00:00.000-07:00

Prosper has asked me to publish the following response:

Dear Fred93,

Thanks for keeping up-to-date on the latest Prosper newsletter. In the Borrower Success Story that you’ve quoted (above), we faithfully reproduced his submitted story without changes. The user's Borrower Success Story quoted the interest rate of "13.4%" when, as you pointed out in your blog, his borrower rate was actually "14.3%." Going forward with the newsletter, we will diligently fact-check each story before publication.

Thanks for posting,

Prosper

Hey, whadda ya know, they read my blog!

Prosper.com - Don't Mislead ... again

2007-09-25T00:00:00.000-07:00

Back in April'07 I wrote an open letter to Prosper.com titled "Don't Mislead People". I think that's a pretty good mantra. I don't know how people write entire books on corporate ethics, when you can say most of it in 3 words. That letter contained a long list of things that Prosper was doing that I thought were misleading. To Prosper's credit I think someone understood at least some of what I was saying, because some of 'em got fixed. I don't think they really intended to mislead. They just weren't thinking clearly. End of story, right?

Recently a few more have appeared. There was a recent Prosper.com online advertisement that used a screen image of a listing page where the interest rate was "photoshopped" to show a lower interest rate than the actual loan. To their credit, Prosper fixed it after a member pointed this out. I wasn't on the ball, and didn't save a copy of the original photoshopped ad. Must have been some overzealous marketing person, eh? End of story, right?

Oops. They did it again! The September borrower newsletter contains a story about a borrower and his loan. It says he obtained an interest rate of 13.4%. Here's a picture from the newsletter. (I have added the red oval.)

Note that it says he "obtained 13.4%". We have to assume that they mean the interest rate that he actually had to pay. On the prosper.com system, that's called the "borrower rate" to distinguish it from the lower interest rate that lenders receive. In fact, it is very clear from context of the ad that they mean the rate he had to pay, because in the quote he compares this to "14%" that the bank wanted to charge him. Well, 13.4% is indeed lower than 14%, so this sounds great until we look at the actual listing page. It tells a different story.

Again I added a red oval, circling the borrower rate this borrower actually obtained. It doesn't agree with the story. It is even a higher interest rate than his bank wanted to charge!

Surely prosper.com would not intentionally publish a misleading story, eh? What do you think?

In either case, it is another in a series of confidence eroding developments. Golly guys, at the very least get your compliance guy to check facts in your ads and newsletters.

Ned Interviews Fred

2007-08-14T00:00:00.000-07:00

Ned: Well Fred, I see you haven't updated your blog since the two open letters to prosper.com . Does that mean everything is going along smoothly now?

Fred: Well... not exactly.

Ned: So did Prosper respond to any of the issues you raised?

Fred: There was a little correspondence, but no action.

Ned: So collections hasn't been fixed?

Fred: We haven't seen any change in collections at all. Zip. Nada. Nothing. This is one area where I got some agreement from Prosper management that things were broken. They just don't care. They view themselves as a broker (ala Ebay), and view the loan servicing business as one where you just turn some cranks and money flows thru (or not) and you scrape off some revenue. They don't take ownership of their own performance at all. The entire collections operation continues to be simply an autodialer. This is one of the reasons default performance is so bad. Its not the only reason, but it is a major one.

Ned: Sad. Well what about groups. Are they fixed?

Fred: Well, no. They aren't. There haven't been any substantive changes in groups at all. Prosper management seemed to think that the little change they made in group leader remuneration would have a large effect on group leader behavior. I don't think that's had much fundamental effect. Prosper invented this fabulous friends/endorsement system which has the potential to provide community effects far superior to the silly group system, but they haven't gone anywhere with it. Frustrating to watch.

Ned: So are the issues you raised in your two open letters still valid?

Fred: Generally yes. Especially open letter #2, because it dealt with collections, and collections has been untouched. Letter #1 on the other hand gave a long list of little detailed examples where Prosper misled folks, or allowed group leaders to mislead folks, and some of those have been cleaned up.

Ned: What other subjects did you plan to hit in your letters?

Fred: I had hoped to do one on communication and community. On the other hand, a lot of people are hitting Prosper pretty hard on these issues of late, so it seems like the problems should be obvious. Can I really add any understanding to the issue? Not sure. Also I'd have to work really hard to stay calm while writing on this subject. Also hoped to do one on the math involved in estimating lender performance. Actually have that half written. Just need to find the enthusiasm to finish it.

Ned: Anything else you'd like to say?

Fred: The lendingstats web site is great. I really missed it when it was down for a few weeks. I thank Mr Lendingstats for bring it back up.

Ned: Thanks Fred. We'll check back in another few months.

Fred: See you then.

Open Letter #2 - Collections is broken

2007-05-06T00:00:00.000-07:00

Second installment of my recommendations to Prosper.com management.

Click the link below to view the letter.

Open letter #2 to Prosper.com

Open Letter #1 - Don't Mislead People

2007-04-20T00:00:00.001-07:00

The first installment of my recommendations to Prosper.com managment.

Click the link below to view the letter.

Open Letter #1 to Prosper.com

Hello Blog

2007-04-20T00:00:00.000-07:00

I’ve been a Prosper lender since near the beginning. Started in April ’06. I was instantly enamored with the idea of Prosper, I mean really excited. I’ve been active every day since then. I’ve invested a substantial amount, which I only mention as a lead in to the next point: I take this seriously.

As the months wore on, I accumulated an understanding that the reality of Prosper, that is the implementation of the great idea, was quite different than the utopian image associated with the idea. I never expected it to be perfect, but I did have some expectations. Of course this is an evolving story, so I continued to participate, and watched. We’re all learning as we go. Me. You. Prosper. Patience is a virtue.

Sadly, I have to report that my disappointment with Prosper’s management has continued to increase month after month, and my enthusiasm has continued to decline. I’m pretty sure that the majority of things that are wrong can be fixed. However my confidence that Prosper’s management will fix them has simply declined with time as I’ve witnessed their response.

So many issues that I don’t really know where to start. Issues of concern range from technical to community relations to ethics. Mixing these randomly produces only soup. I decided the ethics issues should float to the top, so that’s where I will start.

My intention is to post several bundles of thought. It takes time and effort to sort out and package up these ideas cleanly. (Everything I will talk about here has been discussed at length in the Prosper forum, but for whatever reason, that form was incompatible with the input interface to the Prosper management humans. Its like the RJ45 plug didn’t fit into their 25-pin D socket.) I’ll probably poop out long before I’ve covered all the ground that needs to be covered, so let me apologize for that in advance.

It has become popular in modern culture to polarize. Its really a kind of oversimplification . Bush is bad. Bush is good. Whatever it is, boil it down to one sound bite, and then yell and shake your finger. Talk over your opponent to make the TV sound more exciting. I can’t stand that. Everything in the world is more subtle than this dumbed-down approach allows. In particular Prosper-is-bad or Prosper-is-good are not gonna be the subjects here.

Who knows, maybe I will burn thru all the disappointments and post about something positive.